Sabas Company has 20,000 shares of $100 par,2% cumulative preferred stock and 100,000 shares of $50 par common stock.The following amounts were distributed as dividends: Determine the dividends per share for preferred and common stock for the first year.

Question

Sabas Company has 20,000 shares of $100 par,2% cumulative preferred stock and 100,000 shares of $50 par common stock.The following amounts were distributed as dividends:​  Determine the dividends per share for preferred and common stock for the first year.

Quizplus · Accepted Answer

Since the preferred stock is cumulative, it must receive its dividend first before any dividends can be paid to common stockholders. The total dividend paid to preferred shareholders is $20,000 (20,000 shares x $100 par value x 2% dividend rate). 
After the preferred dividend is paid, the remaining amount available for the common stock dividend is $80,000 ($100,000 x $0.80). 
Dividing the amount available for common shareholders ($80,000) by the number of common shares outstanding (100,000) provides a dividend per share of $0.80 per common share. 
Therefore, the dividends per share for preferred and common stock for the first year are $0.50 and $0 respectively, as preferred shareholders will receive their stated dividend of $2 per share before any dividends can be paid to common stockholders.

Sabas Company Has 20,000 Shares of $100 Par,2% Cumulative Preferred