Dividends Per Share

Question

Lightfoot Inc. a software development firm has stock outstanding as follows: 10,000 shares of cumulative preferred 3% stock, $25 par, and 13,000 shares of $75 par common. During its first four years of operations, following amounts were distributed as dividends: first year, $2900; second year $4700; third year $25820; fourth year $44680

Answer 1

Preferred dividend each year = 10,000 × $25 × 3% = $7,500

Because the preferred stock is cumulative, any unpaid preferred dividends carry over to the next year before common stock gets anything.

Dividend distribution:

Year 1: $2,900

1. Preferred: $2,900
2. Common: $0
3. Preferred dividends in arrears: $4,600

Year 2: $4,700

1. Preferred: $4,700
2. Common: $0
3. Preferred dividends in arrears: $7,400

Year 3: $25,820

1. Preferred: $14,900
2. ($7,400 arrears + $7,500 current year)
3. Common: $10,920
4. Preferred dividends in arrears: $0

Year 4: $44,680

1. Preferred: $7,500
2. Common: $37,180

The preferred shareholders are supposed to get $7,500 every year first. Since the stock is cumulative, missed amounts build up. So in Years 1 and 2, all dividends went to preferred. In Year 3, preferred got all unpaid amounts plus the current year’s amount, and only the leftover went to common. In Year 4, preferred got its normal $7,500 and the rest went to common.