Scan Tech Inc., a developer of radiology equipment, has stock outstanding as follows: 24,000...

Question:

Scan Tech Inc., a developer of radiology equipment, has stock outstanding as follows: 24,000 shares of 2% preferred stock of $75 par, and 100,000 shares of$8 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $19,200; second year,$30,000; third year, $75,000; fourth year,$120,000. Calculate the dividends per share on each class of stock for each of the four years.

Allocating Dividends:

Dividends are distributions that a company makes from its accumulated profits to its shareholders. The total dividends that the board of directors declared must be allocated to each class (preferred and common stock for example). No class of stock gives a shareholder a right to a dividend each year, however.

Answer and Explanation: 1

Recall that preferred stock has a preferred right to dividends, and common stockholders will always receive the balance of the dividends after the preferred stockholders.

The preferred stock dividends for each year = $75 x 24,000 = 41,800,000 x 0.02 =$36,000.

It seems that the preferred stock is not cumulative (if it is, it would be stated as such in the stock's description), and therefore preferred stockholders will not get dividends in arrears.

Y1 Y2 Y3 Y4
Dividends declared $19,200$30,000 $75,000$120,000
Dividends allocated to preferred stockholders = limited to $36,000 per year$19,200 $30,000$36,000 $36,000 Dividend per share for preferred stockholders (24,000 share outstanding)$0.80 $1.25$1.50 $1.50 Dividends allocated to common stockholders$0 $0$39,000 $84,000 Dividend per share for common stockholders (100,000 share outstanding)$0 $0$0.39 \$0.84

Cash Dividends & Dividend Payment

from

Chapter 16 / Lesson 1
5.5K

When a company decides to pay a dividend to shareholders, they first have to decide what type of dividend to pay. In this lesson, we'll examine the most common types of dividends and look at the timeline for cash dividend payments.