PA11-4 Comparing Stock and Cash Dividends [LO2, LO3, LO4]

Ritz Company had the following stock outstanding and Retained earnings at December 31, 2010:


Common stock (par $1; outstanding, 500,000 shares) $ 500,000
Preferred stock, 8% (par $10; outstanding, 21,000 shares) 210,000
Retained earnings 900,000


On December 31, 2010, the board of directors is considering the distribution of a cash dividend to the common and preferred stockholders. No dividends were declared during 2008 or 2009. Three independent cases are assumed:

Case A:

The preferred stock is noncumulative; the total amount of 2010 dividends would be $30,000.
Case B:

The preferred stock is cumulative; the total amount of 2010 dividends would be $30,000. Dividends were not in arrears prior to 2008.
Case C: Same as Case B, except the amount is $75,000.

aphael Corporation’s common stock is currently selling on a stock exchange at $85 per share, and its current balance sheet shows the following stockholders’ equity section:



Preferred stock—5% cumulative, $___ par value, 1,000 shares
authorized, issued, and outstanding $ 50,000
Common stock—$___ par value, 4,000 shares authorized, issued,
and outstanding 80,000
Retained earnings 150,000

Total stockholders' equity $ 280,000


Required:
1. What is the current market value (price) of this corporation’s common stock?

To compare the stock and cash dividends for each case, we need to understand the difference between common stock and preferred stock, as well as the concept of cumulative and noncumulative dividends.

Common stock is a form of ownership in a company that entitles the stockholder to a share of the company's profits and voting rights at shareholders' meetings. Preferred stock, on the other hand, has a higher claim on the company's assets and earnings than common stock, and it usually pays a fixed dividend amount.

Cumulative dividends means that if a company fails to pay a dividend in a given year, the unpaid dividends accumulate and must be paid in future years before any dividends can be paid to common stockholders. Noncumulative dividends do not accumulate and, if not paid in a given year, are lost forever.

Now, let's analyze each case to compare the stock and cash dividends:

Case A:
In this case, the preferred stock is noncumulative, and the total amount of 2010 dividends is $30,000. Since the preferred stock is noncumulative, it means that any unpaid dividends in previous years are lost forever. Therefore, the stockholders will receive $30,000 in cash dividends from the company.

Case B:
In this case, the preferred stock is cumulative, and the total amount of 2010 dividends is $30,000. Since the preferred stock is cumulative, any unpaid dividends in previous years must be paid before any dividends can be paid to common stockholders. However, it is mentioned that dividends were not in arrears (unpaid) prior to 2008. Therefore, the preferred stockholders will receive $30,000 in cash dividends, and the common stockholders will not receive any dividends.

Case C:
This case is similar to Case B, except that the total amount of 2010 dividends is $75,000. Since the amount of dividends has increased, the preferred stockholders will not only receive the unpaid dividends from previous years but also their share of the $75,000. The common stockholders, again, will not receive any dividends.

In summary:
- In Case A, the common stockholders will receive $30,000 in cash dividends.
- In Case B, the preferred stockholders will receive $30,000 in cash dividends, and the common stockholders will not receive any dividends.
- In Case C, the preferred stockholders will receive their share of the unpaid dividends from previous years plus their share of the $75,000, and the common stockholders will not receive any dividends.

Remember, to fully understand the treatment of dividends in different scenarios, it is important to consider the specific terms and characteristics of the company's stock and any restrictions or requirements outlined in its bylaws or shareholder agreements.