Question

Lightfoot Inc., a software development firm, has stock outstanding as follows: 20,000 shares of cumulative preferred 4% stock, $20 par, and 25,000 shares of $50 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $6,000; second year, $10,000; third year, $50,250; fourth year, $78,000.Calculate the dividends per share on each class of stock for each of the four years.

Answer 1

Answer:

For first year, we have:

Cumulative preferred dividend per share = $0.30 per share

Common dividend per share = $0

For second year, we have:

Cumulative preferred dividend per share = $0.50 per share

Common dividend per share = $0

For third year, we have:

Cumulative preferred dividend per share = $1.60 per share

Common dividend per share = $0.73 per share

For fourth year, we have:

Cumulative preferred dividend per share = $0.80 per share

Common dividend per share = $2.48 per share

Explanation:

Cumulative preferred stock has a clause that mandates the corporation to pay all dividends, including those that were previously missed, before common shareholders can get their dividend payments.

Annual cumulative preferred dividend = 20,000 * $20 * 4% = $16,000

Therefore, we have:

For First Year

Distributed dividends = $6,000

Cumulative preferred dividend paid = Distributed dividends =  $6,000

Common dividend paid = $0

Cumulative preferred dividend per share = Cumulative preferred dividend paid / Number of cumulative preferred shares outstanding = $6,000 / 20,000 = $0.30 per share

Common dividend per share = $0

Cumulative preferred dividend carried forward = Annual cumulative preferred dividend - Cumulative preferred dividend paid = $16,000 - $6,000 = $10,000

For Second Year

Distributed dividends = $10,000

Cumulative preferred dividend payable = Annual cumulative preferred dividend + Cumulative preferred dividend brought forward = $16,000 + $10,000 = $26,000

Cumulative preferred dividend paid = Distributed dividends = $10,000

Common dividend paid = $0

Cumulative preferred dividend per share = Cumulative preferred dividend paid / Number of cumulative preferred shares outstanding = $10,000 / 20,000 = $0.50 per share

Common dividend per share = $0

Cumulative preferred dividend carried forward = Cumulative preferred dividend payable - Cumulative preferred dividend paid = $26,000 - $10,000 = $16,000

For Third Year

Distributed dividends = $50,250

Cumulative preferred dividend paid = Annual cumulative preferred dividend + Cumulative preferred dividend brought forward = $16,000 + $16,000 = $32,000

Common dividend paid = Distributed dividends - Cumulative preferred dividend paid = $50,250 - $32,000 = $18,250

Cumulative preferred dividend per share = Cumulative preferred dividend paid / Number of cumulative preferred shares outstanding = $32,000 / 20,000 = $1.60 per share

Common dividend per share = Common dividend paid / Number of common shares outstanding = $18,250 / 25,000 = $0.73 per share

For Fourth Year

Distributed dividends = $78,000

Cumulative preferred dividend paid = Annual cumulative preferred dividend = $16,000

Common dividend paid = Distributed dividends - Cumulative preferred dividend paid = $78,000 - $16,000 = $62,000

Cumulative preferred dividend per share = Cumulative preferred dividend paid / Number of cumulative preferred shares outstanding = $16,000 / 20,000 = $0.80 per share

Common dividend per share = Common dividend paid / Number of common shares outstanding = $62,000 / 25,000 = $2.48 per share