Question

Green Planet Corporation has 6,000 shares of noncumulative 11% preferred stock with a $2 par value and 21,900 shares of common stock with a $0.01 par value. During its first two years of operation, Green Planet declared and paid the following total cash dividends. Year 1 total cash dividends $ 640 Year 2 total cash dividends 2,190 Compute the dividends paid each year to each of the two classes of stockholders assuming that the preferred stock is cumulative.
Year 1 total cash dividends $640
Year 2 total cash dividends $2,190

Answer 1

Preferred dividends = preferred shares x Par value of 1 preferred stock x Preferred dividend rate

Preferred dividend = 6000 shares x 11% x $2 = $1320

Total dividend paid in year 1= $640

Preferred stockholders will receive a cash dividend of $640 in the first year. Because preferred stocks are not cumulative, there will be no preferred stock divided in arrears in year 1.

Arrear of dividends = $1320 - $640 = $680

Total dividend in year 2 = $2190

Dividend paid on common stock in year 2 = dividend paid in year 2 - Annual preferred dividends

=> 2190 - 1320 = $870