The stockholders’ equity section of Lemay Corporation shows the following on Dec

Question

The stockholders’ equity section of Lemay Corporation shows the following on December 31, 2011:

Preferred stock – 6%, 4,100 par, 4,000 shares outstanding............$ 400,000

Common stock – $20 par, 60,000 shares outstanding........................600,000

Paid-in capital in excess of par...........................................................200,000

Retained Earnings..........................................................................114,000

Total stockholders’ equity.................................................................$1,314,000

Instructions:

Assuming that all of the company’s retained earnings are to be paid out in dividends on 12/31/11 and preferred dividends were last paid on 12/31/09, show how much the preferred and common stockholders should receive if the preferred stock is cumulative and fully participating.

Explanation / Answer

For cumulative Preferred stock the dividend- When a company fails to pay a dividend, holders of cumulative preference shares are entitled to receive this missed payment when a dividend is next declared. So when the dividend is declared if there is sufficient cash than the cumulative and current dividend both will be paid and if than the balance left it would be paid to common stockholders.

6% is the dividend rate for Preferred stockholders= $400000*6%= $24000 for one year.

Last dividend was paid on 12/31/09. So dividend for 2010 and 2011 will be paid one is cumulative and 2011 is current year. So total dividend to be paid to preferred stockholder= $24000*2=$48000

Now the balance of retained earnings $114000-$48000= $66000 will be distributed ad dividend to common stockholders per share= 66000/30000= $2.2 per share

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