Basic Economics

Question

A corporation has 1,000 shares of preferred stock and 4,000 shares of common stock. The preferred stock has a prior claim to an annual $8 dividend. If the annual profits to be distributed for the first three years were $20,000, $35,000, and 60,000 respectively, how much would be distributed to preferred stock and common stock? Also, calculate the dividends per share.

Answer 1

preferred stocks (p) = 1000

common stocks (c) = 4000

total stocks (t) = 5000

annual p claims = $8 * 1000 = $8000

year 1

remaining profits = 20000 - 8000 = $12000

dividends per share = 12000 / 5000 = $2.4

common stock total dividends = $2.4 * 4000 = $9600

preferred stock total dividends = $2.4 * 1000 + $8000 = $10400

dividend per share of common stock = $2.4

dividend per share of common stock = $2.4 + $8 = $10.4

year 2

remaining profits = 35000 - 8000 = $27000

dividends per share = 27000 / 5000 = $5.4

common stock total dividends = $5.4 * 4000 = $21600

preferred stock total dividends = $5.4 * 1000 + $8000 = $13400

dividend per share of common stock = $5.4

dividend per share of common stock = $5.4 + $8 = $13.4

year 3

remaining profits = 60000 - 8000 = $52000

dividends per share = 52000 / 5000 = $10.4

common stock total dividends = $10.4 * 4000 = $41600

preferred stock total dividends = $10.4 * 1000 + $8000 = $18400

dividend per share of common stock = $10.4

dividend per share of common stock = $10.4 + $8 = $18.4