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: Year 1:
$10,000
Year 2:
45,000
Year 3:
90,000
Determine the dividends per share for preferred and common stock for the first year.

Question

Quizplus · Accepted Answer

The preferred stock is cumulative, meaning any unpaid dividends from previous years must be paid before common stockholders can receive any dividends. In Year 1, the company distributed $10,000 in dividends. Since the preferred stock is cumulative, the full $4,000 (2% of $100 par value x 20,000 shares) must be paid to preferred shareholders before any dividends can be distributed to common shareholders. This leaves $6,000 ($10,000 - $4,000) to be distributed to common shareholders.

Dividends per share for preferred stock: $4,000 / 20,000 shares = $0.50 
Dividends per share for common stock: $6,000 / 100,000 shares = $0.06 
However, since the question asks for dividends per share rounded to the nearest cent, the answer is $0.50 and $0.10.

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