Electro-Rad Inc., a developer of radiology equipment, has stock outstanding as follows: 50,000 shares of 2%, preferred stock of $50 par, and 100,000 shares of $25 par common. During its first four years of operations, the following amounts were distributed as dividens: first year, $40,000; second year, $98,000; third year, $120,000; fourth year, $195,000. Calculate the dividens per share on each class of stock for each of the four years
To calculate the dividends per share on each class of stock for each of the four years, you need to follow these steps:
1. Calculate the total dividends for each year by adding up the dividend amounts given.
2. Calculate the dividends per share for the preferred stock by dividing the total dividends for each year by the number of preferred shares outstanding.
3. Calculate the dividends per share for the common stock by dividing the remaining dividends (after paying the preferred stock dividends) by the number of common shares outstanding.
Let's go through each year step by step:
First Year:
Total dividends = $40,000
Dividends per share for preferred stock = Total dividends / Number of preferred shares
Dividends per share for common stock = (Total dividends - Preferred dividends) / Number of common shares
Preferred Dividends: 50,000 shares * $50 par * 2% = $50,000
Remaining dividends for common stock: $40,000 - $50,000 = -$10,000 (negative because the preferred dividends exceed the total dividends)
Since there are no remaining dividends for the common stock, the dividends per share for the common stock in the first year will be $0.
Second Year:
Total dividends = $98,000
Dividends per share for preferred stock = Total dividends / Number of preferred shares
Dividends per share for common stock = (Total dividends - Preferred dividends) / Number of common shares
Preferred Dividends: 50,000 shares * $50 par * 2% = $50,000
Remaining dividends for common stock: $98,000 - $50,000 = $48,000
Dividends per share for preferred stock: $50,000 / 50,000 shares = $1 per share
Dividends per share for common stock: $48,000 / 100,000 shares = $0.48 per share
Third Year:
Total dividends = $120,000
Dividends per share for preferred stock = Total dividends / Number of preferred shares
Dividends per share for common stock = (Total dividends - Preferred dividends) / Number of common shares
Preferred Dividends: 50,000 shares * $50 par * 2% = $50,000
Remaining dividends for common stock: $120,000 - $50,000 = $70,000
Dividends per share for preferred stock: $50,000 / 50,000 shares = $1 per share
Dividends per share for common stock: $70,000 / 100,000 shares = $0.70 per share
Fourth Year:
Total dividends = $195,000
Dividends per share for preferred stock = Total dividends / Number of preferred shares
Dividends per share for common stock = (Total dividends - Preferred dividends) / Number of common shares
Preferred Dividends: 50,000 shares * $50 par * 2% = $50,000
Remaining dividends for common stock: $195,000 - $50,000 = $145,000
Dividends per share for preferred stock: $50,000 / 50,000 shares = $1 per share
Dividends per share for common stock: $145,000 / 100,000 shares = $1.45 per share
To summarize:
Year 1:
Preferred Stock Dividends per Share: $1
Common Stock Dividends per Share: $0
Year 2:
Preferred Stock Dividends per Share: $1
Common Stock Dividends per Share: $0.48
Year 3:
Preferred Stock Dividends per Share: $1
Common Stock Dividends per Share: $0.70
Year 4:
Preferred Stock Dividends per Share: $1
Common Stock Dividends per Share: $1.45