Written, Inc. has outstanding 600,000 shares of $2 par common stock and 120,000 shares of no-par 8% preferred stock with a stated value of $5. The preferred stock is cumulative and nonparticipating. Dividends have been paid in every year except the past two years and the current year.Assuming that $366,000 will be distributed, and the preferred stock is also participating, how much will the common stockholders receive?

Question

Quizplus · Accepted Answer

First, we need to calculate the preferred stock dividend that needs to be paid. The preferred stock has a stated value of $5 per share and pays an 8% dividend, which means it pays $0.40 per share ($5 * 8%). This preferred dividend is cumulative, which means that the company owes the preferred shareholders all unpaid dividends from prior years plus the current year's dividend.

The company has missed the preferred dividend for the past two years, so the preferred shareholders are owed $0.40 per share * 120,000 shares * 2 years = $96,000 in unpaid dividends. Add to that the current year's preferred dividend of $0.40 per share * 120,000 shares = $48,000. Thus, the total amount of preferred dividend that needs to be paid is $144,000 ($96,000 + $48,000).

Since the preferred stock is also participating, it means that it will receive its full dividend of $0.40 per share before any dividend can be paid to the common stockholders. Therefore, the remaining $222,000 ($366,000 - $144,000) will be paid to the common stockholders.

The common stock has a par value of $2 per share, but par value is irrelevant when calculating dividends. Therefore, we simply divide the remaining $222,000 by the total number of common shares outstanding: $222,000 / 600,000 shares = $0.37 per share.

So, the common stockholders will receive $0.37 per share, for a total payment of $222,000. Therefore, the correct answer is B) $180,000.