Gemstar Pencil Company issued participating preferred stock last year with a 9 percent dividend rate and $50 par value. The board of directors has just voted to pay preferred shareholders their regular annual dividend, but also has declared a $10 per share common stock dividend. The participation formula calls for common and preferred stockholders to share equally in any net earnings. How much in additional earnings beyond the regular annual dividend will the preferred shareholders receive?

Question

Quizplus · Accepted Answer

The preferred shareholders will receive an additional $5.50 per share in earnings beyond the regular annual dividend. This is because the participation formula calls for common and preferred stockholders to share equally in any net earnings. The common stock dividend of $10 per share will reduce the net earnings available to the preferred shareholders by $5 per share. Therefore, the preferred shareholders will receive an additional $5.50 per share in earnings beyond the regular annual dividend.

Gemstar Pencil Company Issued Participating Preferred Stock Last Year with a 9