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30,000 shares of5% cumulative preferred stock, par
value $10 per share, fully participating as to dividends.
No dividends were in arrears.
•200,000 shares of common stock, par value $1 per share.
On December15, year1, Arp declared dividends of $100,000.
What was the amount of dividends payable to Arp’s common
stockholders?
a. $10,000
b. $34,000
c. $40,000
d. $47,500
The Correct answer is C.$40,000. This is the amount of dividend to be distributed among Common Share holders of the Ott Corps.
Notes :-
As the preferred Shareholders are the first priority on dividends over Common Share holders, we will distribute the dividend for them first :-
No. of preferred shares X Par Value X Percentage =
30,000x10x5 = $60,000, and the dividend declared is $1,00,000, so the remaining amount goes to the Common Shareholders, which is $40,000
Total par value of preferred stock outstanding is $300,000 (30,000 x $10), and total par value of common stock outstanding is $200,000 (200,000 x $1). Total par value of all stock outstanding is therefore $500,000. Preferred is3/5 of total par value outstanding ($300,000/$500,000) and common is2/5 ($200,000/$500,000) of total par value outstanding.2005 preferred requirement:30,000(.05)($10) = $15,000 Preferred percentage to common: .05(200,000)($1) =10,000 --> $10,000 Subtotal $25,000 Remaining dividends: $100,000 - $25,000 = $75,000 Participation to preferred, based on total par value: $75,000(3/5) = $45,000 Participation to common, based on total par value: $75,000(2/5) =30,000 --------------------->30,000 Total common dividends
