Sterling Garde Corporation has 90,000 shares of $1.70 preferred stock outstanding in addition to its common stock. The $1.70 designation means that the preferred stockholders receive an annual cash dividend of $ 1.70 per share. In 2018, Sterling Garde declares an annual dividend of $ 500,000. The allocation to preferred and common stockholders is:
Answer
When a company has issued both preferred and common stock, the preferred stockholders receive their dividends first. The common stockholders receive dividends only if the total dividend is large enough to pay the preferred stockholders first. The allocation of dividends may be complex if the preferred stock is cumulative. Corporations sometimes fail to pay a dividend to preferred stockholders. This is called passing the dividend, and the passed dividends are said to be in arrears. The owners of cumulative preferred stock must receive all dividends in arrears plus the current year's dividend before any dividends go to the common stockholders.
1. How much in dividends must Sterling Garde declare each year before the common stockholders receive any cash dividends for the year?
The preferred stockholders must receive their dividends first before the common stockholders can receive any cash dividends. Use the formula below to calculate the preferred stockholders' annual dividend.
2. Suppose Sterling Garde declares cash dividends of $ 550,000 for 2018. How much of the dividends goes to preferred shareholders? How much goes to common shareholders?
We know that total dividends paid during 2018 amounts to $ 550,000, and of that amount, $ 153,000 must be paid to preferred stockholders first. The remaining amount of the dividend will go to the common shareholders. Go ahead and complete the table below by calculating the amount of the common dividend for 2018.
3. Is Sterling Garde's preferred stock cumulative or noncumulative? How can you tell?
Remember that the allocation of dividends may be complex if the preferred stock is cumulative. In most states preferred stock is cumulative unless it is specifically labeled as noncumulative. Therefore, most preferred stock is cumulative. Is Sterling Garde's preferred stock cumulative or noncumulative?
4. Sterling Garde passed the preferred dividend in 2017 and 2018. Then in 2019, Sterling Garde declares cash dividends of $ 1,200,000 How much of the dividends goes to preferred shareholders? How much goes to common shareholders?
We have determined that the preferred shares are cumulative, therefore, the preferred stockholders will be paid the dividends in arrears for 2017, 2018 and 2019. Next, let's calculate the dividends owed to the preferred stockholders at the end of 2019:
Finally, we can calculate the common dividends. We know that total dividends paid during 2019 amounts to $ 1,200,000, and that of that amount, $ 459,000 must be paid to preferred stockholders first. The remaining amount of the dividend, then, will go to the common shareholders. Go ahead and complete the table below by calculating the amount of the common dividend for 2019.
thanks
Answer
When a company has issued both preferred and common stock, the preferred stockholders receive their dividends first. The common stockholders receive dividends only if the total dividend is large enough to pay the preferred stockholders first. The allocation of dividends may be complex if the preferred stock is cumulative. Corporations sometimes fail to pay a dividend to preferred stockholders. This is called passing the dividend, and the passed dividends are said to be in arrears. The owners of cumulative preferred stock must receive all dividends in arrears plus the current year's dividend before any dividends go to the common stockholders.
1. How much in dividends must Sterling Garde declare each year before the common stockholders receive any cash dividends for the year?
The preferred stockholders must receive their dividends first before the common stockholders can receive any cash dividends. Use the formula below to calculate the preferred stockholders' annual dividend.
2. Suppose Sterling Garde declares cash dividends of $ 550,000 for 2018. How much of the dividends goes to preferred shareholders? How much goes to common shareholders?
We know that total dividends paid during 2018 amounts to $ 550,000, and of that amount, $ 153,000 must be paid to preferred stockholders first. The remaining amount of the dividend will go to the common shareholders. Go ahead and complete the table below by calculating the amount of the common dividend for 2018.
3. Is Sterling Garde's preferred stock cumulative or noncumulative? How can you tell?
Remember that the allocation of dividends may be complex if the preferred stock is cumulative. In most states preferred stock is cumulative unless it is specifically labeled as noncumulative. Therefore, most preferred stock is cumulative. Is Sterling Garde's preferred stock cumulative or noncumulative?
4. Sterling Garde passed the preferred dividend in 2017 and 2018. Then in 2019, Sterling Garde declares cash dividends of $ 1,200,000 How much of the dividends goes to preferred shareholders? How much goes to common shareholders?
We have determined that the preferred shares are cumulative, therefore, the preferred stockholders will be paid the dividends in arrears for 2017, 2018 and 2019. Next, let's calculate the dividends owed to the preferred stockholders at the end of 2019:
Finally, we can calculate the common dividends. We know that total dividends paid during 2019 amounts to $ 1,200,000, and that of that amount, $ 459,000 must be paid to preferred stockholders first. The remaining amount of the dividend, then, will go to the common shareholders. Go ahead and complete the table below by calculating the amount of the common dividend for 2019.
thanks
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