Answer:
1-a. We have:
Total amount to be paid as dividend to preferred stockholders = $9,312.40
Amount to be paid as dividend per share to preferred stockholders = $1.24 per share
Total amount to be paid as dividend to common stockholders = $54,287.60
Amount to be paid as dividend per share to common stockholders = $1.13 per share
1-b. We have:
Total amount to be paid as dividend to preferred stockholders = $27,937.20
Amount to be paid as dividend per share to preferred stockholders = $3.72 per share
Total amount to be paid as dividend to common stockholders = $35,662.80
Amount to be paid as dividend per share to common stockholders = $0.74 per share
2. The reason is that the unpaid dividends in 2017 and 2018 were carried forward and paid together with 2019 dividend to cumulative preferred stockholders, but this cannot be done when the preferred stock is noncumulative.
3. Some the factors include making preferred stock noncumulative, declaration of a higher cash dividend, redemption of redeemable preference shares so that only common stockholders receive dividends, and among others.
Explanation:
Note: This question is not complete and there is an error in the amount of the dividend being considered. The complete question is therefore presented with the correct dividend amount before answering the question as follows:
The records of Hoffman Company reflected the following balances in the stockholders' equity accounts at December 31, 2018:
Common stock, par $12 per share, 48,000 shares outstanding.
Preferred stock, 8 percent, par $15.5 per share, 7,510 shares outstanding.
Retained earnings, $236,000.
On January 1, 2019, the board of directors was considering the distribution of a $63,600 cash dividend. No dividends were paid during 2017 and 2018.
Required:
1. Determine the total and per-share amounts that would be paid to the common stockholders and to the preferred stockholders under two independent assumptions:
a. The preferred stock is noncumulative.
b. The preferred stock is cumulative.
2. Why were the dividends per share of common stock less for the cumulative preferred stock than the noncumulative preferred stock?
3. What factors would cause a more favorable dividend for the common stockholders?
The explanation of the answrs is now given as follows:
1-a. Determine the total and per-share amounts that would be paid to the common stockholders and to the preferred stockholders under the assumption that the preferred stock is noncumulative.
Total amount to be paid as dividend to preferred stockholders = Annual preferred stock dividend = 8% * $15.5 * 7,510 = $9,312.40
Amount to be paid as dividend per share to preferred stockholders = Total amount to be paid as dividend to preferred stockholders / Number of Preferred shares outstanding = $9,312.40 / 7,510 = $1.24 per share
Total amount to be paid as dividend to common stockholders = Amount of cash dividend being considered - Total amount to be paid as dividend to preferred stockholders = $63,600 - $9,312.40 = $54,287.60
Amount to be paid as dividend per share to common stockholders = Total amount to be paid as dividend to common stockholders / Number of common shares outstanding = $54,287.60 / 48,000 = $1.13 per share
1-b. Determine the total and per-share amounts that would be paid to the common stockholders and to the preferred stockholders under the assumption that the preferred stock is cumulative.
Annual preferred stock dividend = 8% * $15.5 * 7,510 = $9,312.40
Total amount to be paid as dividend to preferred stockholders = Annual preferred stock dividend for 3 years for 2017, 2018 and 2019 = $9,312.40 * 3 = $27,937.20
Amount to be paid as dividend per share to preferred stockholders = Total amount to be paid as dividend to preferred stockholders / Number of Preferred shares outstanding = $27,937.20 / 7,510 = $3.72 per share
Total amount to be paid as dividend to common stockholders = Amount of cash dividend being considered - Total amount to be paid as dividend to preferred stockholders = $63,600 - $27,937.20 = $35,662.80
Amount to be paid as dividend per share to common stockholders = Total amount to be paid as dividend to common stockholders / Number of common shares outstanding = $35,662.80 / 48,000 = $0.74 per share
2. Why were the dividends per share of common stock less for the cumulative preferred stock than the noncumulative preferred stock?
The reason is that the unpaid dividends in 2017 and 2018 were carried forward and paid together with 2019 dividend to cumulative preferred stockholders, but this cannot be done when the preferred stock is noncumulative.
3. What factors would cause a more favorable dividend for the common stockholders?
Some the factors include making preferred stock noncumulative, declaration of a higher cash dividend, redemption of redeemable preference shares so that only common stockholders receive dividends, and among others
