Question

Tower Corp. had the following stock outstanding and Retained Earnings at December 31, 2018: Common Stock (par $8; outstanding, 30,000 shares) $ 240,000 Preferred Stock, 8% (par $10; outstanding, 6,000 shares) 60,000 Retained Earnings 280,000 On December 31, 2018, the board of directors is considering the distribution of a cash dividend to the common and preferred stockholders. No dividends were declared during 2016 or 2017, and none have been declared yet in 2018. Three independent cases are assumed: Case A: The preferred stock is noncumulative; the total amount of 2018 dividends would be $12,600. Case B: The preferred stock is cumulative; the total amount of 2018 dividends would be $14,400. Dividends were not in arrears prior to 2016. Case C: Same as Case B, except the total dividends are $66,000. Required: 1-a. Compute the amount of 2018 dividends, in total that would be payable to each class of stockholders if dividends were declared as described in each case. TIP: Preferred stockholders with cumulative dividends are to be paid dividends for any prior years (in arrears) and for the current year before common stockholders are paid. 1-b. Compute per case, the 2018 dividends per share, payable to each class of stockholders.

Answer 1

Answer:

A)

common stock dividends   9,600  // 0.32 EPS

preferred stock dividends  4,800 //0.8 EPS

B)

preferred stock dividends 14,400  // 2.4 EPS

C)

common stock dividends   51,600  // 1.72 EPS

preferred stock dividends  14,400 // 2.4 EPS

Explanation:

preferred stock 6,000 shares x $10 each x 8% = 4,800

If noncumulative then:

14,400 - 4,800 = 9,600 for common stock

EPS:

4,800 / 6,000 = 0.8 PS

9,600 / 30,000 = 0.32 CS

if cumulative:

4,800 x 3 years (2016 // 2017 and the current year 2018) = 14,400

EPS

14,400 / 6,000 = 2.4 PS

if dividends are 66,000 rather than 14,400

66,000 - 14,400 = 51,600

EPs 51,600 / 30,000 = 1.72