After payment of all claims apart from payments to capital contributors, the liquidator prepared the following statement of shareholders' equity for Train Ltd:
$\begin{array}{llcc}
\text { Preference shares $ (20000) $ } &40000 \
\text { Ordinary shares (100 000) } &300000\
\text {Accumulated losses } &\underline{(155000)}\
\text { Total} &185000\
\end{array}$

There is $125 000 cash remaining for distribution and all shares are fully paid.What is the dividend per preference share if preference shareholders rank equally with ordinary shareholders? (Note: Round amounts to nearest cent.)

Question

After payment of all claims apart from payments to capital contributors, the liquidator prepared the following statement of shareholders' equity for Train Ltd:
$\begin{array}{llcc}
  \text { Preference shares $ (20000) $ } &40000  \
 \text { Ordinary shares (100 000) } &300000\
 \text {Accumulated losses  } &\underline{(155000)}\
 \text {  Total} &185000\
\end{array}$

There is $125 000 cash remaining for distribution and all shares are fully paid.What is the dividend per preference share if preference shareholders rank equally with ordinary shareholders? (Note: Round amounts to nearest cent.)

Quizplus · Accepted Answer

First, we need to divide the remaining cash ($125,000) between preference and ordinary shareholders according to their respective share of equity. The equity ratio of preference shares to ordinary shares is $40,000:$300,000 or $4:$30. Thus, the preference shareholders are entitled to $(4/34)\cdot$ $125,000 =$ $14,706$ (rounded off to nearest cent).

There are $20,000$ preference shares, so the dividend per preference share is $14,706/20,000 =$ $0.7353$ (rounded off to nearest cent).

However, the question asks for the dividend per preference share if preference shareholders rank equally with ordinary shareholders. This means that preference shareholders are entitled to $1$ share for every $30/4 = 7.5$ ordinary shares. Thus, the number of preference shares is increased to $20,000 + (7.5 \cdot 100,000) =$ $770,000.$ The dividend per preference share is therefore $14,706/770,000 =$ $0.0191,$ which, when rounded off to the nearest cent, is $1.04.$

Therefore, the correct answer is C.

After Payment of All Claims Apart from Payments to Capital