Stockholder's equity dividend question

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  • #197445
    Anonymous
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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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