Dividend Distribution: Power Corporation Has The Following S

dividend Distributionpower Corporation Has The Following Shares Outs

Power Corporation has the following shares outstanding: 15,000 shares of $50 par value, 8% preferred stock, and 50,000 shares of $5 par value common stock. During its first three years, the firm declared no dividends in the first year, $280,000 in dividends in the second year, and $60,000 in dividends in the third year. Determine the total dividends paid to each class of stock for each year under two scenarios: (a) if the preferred stock is cumulative, and (b) if it is noncumulative.

Paper For Above instruction

The distribution of dividends between preferred and common shareholders is a crucial aspect of corporate finance and is heavily influenced by the terms set forth for each class of stock. In Power Corporation's case, with preferred stock at 8% dividend rate on a $50 par value and common stock with a $5 par value, understanding how dividends are allocated over three years depends on whether the preferred stock is cumulative or noncumulative.

Part A: Cumulative Preferred Stock

Preferred stock is termed cumulative when any dividends that are omitted in a year are carried forward and paid in subsequent years before any dividends are paid to common shareholders. For Power Corporation, with 15,000 shares of preferred stock at a $50 par value and 8% dividend rate, the annual dividend per preferred share is calculated as:

Annual preferred dividend = 8% of $50 = $4 per share

Total preferred dividend obligation = 15,000 shares × $4 = $60,000 annually.

In the scenario where preferred stock is cumulative, the dividend obligations for each year are as follows:

• Year 1: No dividends declared, so omitted dividends accumulate.
• Year 2: Dividends declared = $280,000. Since preferred stock dividends for the year are $60,000, the preferred shareholders are entitled to this amount, and the remaining $220,000 (if any) goes to common shareholders. Here, preferred stock received $60,000, and common stock received $220,000.
• Year 3: Dividends declared = $60,000. Since preferred dividends for Year 2 were fully paid, no accumulated dividends are owed. The preferred shareholders receive their $60,000, and the remaining $0 goes to common shareholders.

Summary of dividends to preferred and common stock for cumulative preferred stock:

Part B: Noncumulative Preferred Stock

Noncumulative preferred stock does not carry over unpaid dividends from previous years. If dividends are not declared in a particular year, preferred shareholders do not receive any dividends for that year. For the same preferred stock, the dividend distribution over the three years is as follows:

• Year 1: No dividends declared, so preferred shareholders receive $0. Common shareholders receive $0.
• Year 2: Dividends declared = $280,000. Preferred shareholders are entitled to $60,000; remaining $220,000 goes to common shareholders.
• Year 3: Dividends declared = $60,000. Preferred shareholders receive $60,000, and common shareholders receive the remaining amount, which is $0 because all dividends are distributed to preferred shareholders.

Summary for noncumulative preferred stock:

In conclusion, the key difference between cumulative and noncumulative preferred stock lies in whether unpaid dividends accumulate. Cumulative preferred stock accumulates unpaid dividends over years, which must be paid out before any dividends go to common shareholders, whereas noncumulative stock only pays dividends for the years in which dividends are declared, with unpaid dividends forfeited.

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