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Can anyone please tell me what is relative capitalization? How can I calculate to get there? I got a question like this in becker review.
Division Corporation has 20,000 shares of $5.00 participating 9 percent cumulative preferred stock and 100,000 shares of $2.00 common stock. On July 1, the board of Division declared a $30,000 dividend at the time the common stock was selling for $25 per share and the preferred stock was selling for $30. The total dividends paid to each class of stock on the payment date was:
Preferred Common
a. $10,000 $20,000
b. $9,500 $20,500
c. $16,000 $14,000
d. $12,500 $17,500
Explanation
Choice “a” is correct. Participating preferred stock splits dividend distributions with common shareholders only after the common shareholders have received percentage dividends equivalent to preferred shareholders. The remaining dividend is shared in relation to relative capitalization. The following calculation illustrates the distribution of dividends by share classification.
Preferred Common
Capitalization
Dividends
Dividends
Total dividends declared
$30,000
Shares
20,000
100,000
Par value
$5.00
$2.00
Total capitalization
$100,000
$200,000
$300,000
Preferred dividend rate
9%
9%
Dividends
$9,000
$18,000
$27,000
Relative capitalization
33.3%
66.7%
Undistributed dividends subject to participation
$1,000
$2,000
$3,000
Total dividends per class
$10,000
$20,000
$30,000
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