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The records of Hollywood Company reflected the following balances in the stockholders' equity...

Question:

The records of Hollywood Company reflected the following balances in the stockholders' equity accounts at December 31, 2013

Common stock, par $12 per share, 37,000 shares outstanding

Preferred stock, 9 percent, par $10 per share, 7,000 shares outstanding

Retained earnings, $225,000

On September 1, 2014, the board of directors was considering the distribution of a $67,000 cash dividend. No dividends were paid during the previous two years. You have been asked to determine dividend amounts under two independent assumptions

a. The preferred sock is noncumulative.

b. The preferred stock is cumulative.

Required:

1. Determine the total and per share amounts that would be paid to the common stockholders and to the preferred stockholders under the two independent assumptions. Round per share to 2 decimal places.

Preffered Common
Noncumulative:
Total
Per share
Cumulative:
Total
Per share

Dividends:

Dividends are distributions of capital made by companies to investors. This is one of the manners in which investors hope to earn a return on their investment in stocks. Dividends are first paid to preferred stockholders. Any remainder is then paid to common stockholders.

Answer and Explanation:

Let's begin by determining the amount owed to preferred shareholders per year.

  • Preferred Dividend = Par Value per Share x Shares Outstanding x Dividend Percentage
  • Preferred Dividend = $10 per share x 7,000 shares x 9%
  • Preferred Dividend = $70,000 x 9%
  • Preferred Dividend = $6,300

Preferred Common Explanation
Noncumulative:
Total $6,300 $60,700 Preferred: Dividend per year = $6,300
Common: $67,000 - $6,300
Per share $0.90 $1.64 Preferred: $6,300 / 7,000 shares
Common: $60,700 / 37,000 shares
Cumulative:
Total $18,900 $48,100 Preferred: $6,300 per year x 3 years
Common: $67,000 - $18,900
Per share $2.70 $1.30 Preferred: $18,900 / 7,000 shares
Common: $48,100 / 37,000 shares

Learn more about this topic:

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Cash Dividends & Dividend Payment

from Finance 101: Principles of Finance

Chapter 16 / Lesson 1
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