Exercise 5: Distributing Dividends When a company has both Common and Preferred shares outstanding, the pot of money declared as a dividend must be allocated between the Common and Preferred shareholders. A designated annual dividend rate is assigned to each Preferred share (expressed as a % or a $ amount). This annual dividend must be paid before any amounts are paid to Common shareholders. In addition, if the Preferred shares also have a cumulative feature attached, the company must pay any unpaid amounts (Dividends in Arrears) from previous years before paying the Common shareholders. Review the following completed example: Belson Corporation has 10,000 outstanding common shares with a par value of $1 per share. There are 5,000 outstanding cumulative preferred shares with a dividend rate of $5 per share and a par of $100 per share. The Board of Directors declares a total of $40,000 in Year 1 and $20,000 in Year 2 and $70,000 in Year 3 available for dividends. No dividends are in arrears going into Year 1. Determine how much should be paid to each class of stock each year. Preferred (5,000 shares x $5 per) Dividends in Arrears Total Preferred Common (get the remainder) Total Balance- Dividends in Arrears Year 1 25,000 Year 2 20,000 Year 3 25,000 0 5,000 0 20,000 30,000 25,000 0 15,000 40,000 40,000 20,000 70,000 0 5,000 0 NOTE: Remember, the preferred dividend rate may be expressed as a % rather than a per share dollar amount. For instance, in the above example the $5 per share rate may instead be expressed as 5% (5% x $100 par = $5 dividend per share). Next, use the chart below to complete the following problem: Next, use the chart below to complete the following problem: Carter Corporation has 8,000 outstanding common shares with a par value of $1 per share. There are 6,000 outstanding cumulative preferred shares with a dividend rate of $3 per share and a par of $40 per share. The Board of Directors declares a total of $60,000 in Year 1 and $15,000 in Year 2 and $70,000 in Year 3 available for dividends. No dividends are in arrears going into Year 1. Determine how much should be paid to each class of stock each year. Preferred (6,000 shares x $3 per) Dividends in Arrears Total Preferred Common (get the remainder) Total Balance- Dividends in Arrears Year 1 Year 2 Year 3