Dividend Allocation

Question 1

What is the order of dividends paid:

Answer 1

1) Preferred: Dividends in arrears
2) Preferred: Current period dividend
3) Common Stock: matching amount = preferred percentage X total par of common outstanding
4) Preferred: Additional percentage
5) Common: Remainder

Question 2

What are fully participating shares?

Answer 2

After dividends in arrears are paid and common receives it’s matching amount, the remaining dividends are allocated based on proportion of total amount.

If the dividends are not sufficient to pay common its matching amount, then there is no participation to preferred.

Question 3

Example of Fully Participating:

• 1,000 shares of 6%, $100 par cumulative fully participating preferred stock outstanding
• 15,000 shares of $20 par common outstanding
• One year of preferred dividends in arrears
• $40,000 of dividends are declared for the year

What is the annual dividend commitment for preferred?

What is the dividend allocation to preferred and common shareholders?

Answer 3

1) What is the annual dividend commitment for preferred? (1,000 * 100 * .06) = $6,000

2) Total Par Value Proportions:
Preferred: 100,000 (1/4)
Common: 300,000 (3/4)
Total: 400,000

STEPS:

1) Arrears: $6,000
2) Current Year: $6,000
3) Match ($300,000 * .06)= 18,000
4) Participation ($10,000 X 1/4) = 2,500 (preferred)
5) Participation ($10,000 X 3/4)= 7,500 (common)

Question 4

What if the dividends were only $25,000

Answer 4

1) Arrears: $6,000
2) Current Year: $6,000
3) Match (300,000 *.06) $13,000 common

Question 5

If the shares are PARTIALLY Participating, how does that change the accounting from fully participating?

Answer 5

1) After common is paid its matching, preferred receives dividends UP TO an additional percentage

If dividends are not sufficient to preferred to provide the additional percentage to both preferred and common, then each receives its share based on proportion of total par value

Question 6

Preferred is participating up to an additional 3%

One year of dividends are in arrears

$45,000 of dividends are declared for the year:

Answer 6

1) Arrears: $6000
2) Current year: $6,000
3) Matching (300,000 * .06) $18,000
4) Participation (100,000 * .03) 3,000
5) Remainder goes to common shareholder or $12,000

Question 7

What if the dividends declared are only $38,000?

Answer 7

1) Arrears: 6,000
2) Current Year: 6,000
3) Matching (300,000 *.06)= 18,000

Remainder: 8,000 remains (not enough)

4) Participation: (8,000 X .25)- Preferred
5) Participation: (8,000 X .75) -Common