Table 13-3
Spencer Ltd. has 25,000 shares of $4, cumulative preferred shares outstanding and 75,000 common shares. At the end of the current year, Spencer Ltd. declares a dividend of $400,000. Dividends have not been paid for the previous two years.
-Refer to Table 13-3.What is the dividend per share to preferred and common shareholders?

Question

Quizplus · Accepted Answer

The preferred shares are cumulative which means that the dividends that have not been paid in the previous two years will accrue and must be paid before any dividends can be paid to common shareholders.
Dividend to preferred shareholders = ($4 per share x 25,000 shares) = $100,000 (as all prior years' dividend needs to be cleared)
Remaining dividend for common shareholders = $400,000 - $100,000 = $300,000
Dividend per common share = $300,000 / 75,000 shares = $4.00
Dividend per preferred share = $100,000 / 25,000 shares = $12.00

Table 13-3 Spencer Ltd. Has 25,000 Shares of $4, Cumulative Preferred Shares