Total Contributed Capital $62,000The company has both preferred stockholders and common stockholders. The preferredstockholders own 1,000 shares (shares issued by the company) out of a total of 5,000 shares thecompany's articles of incorporation allow it to issue (called authorized shares). The preferredstock has a par value of $10 per share and a dividend rate of 8%. Notice the $10,000 in thepreferred stock account is the par value of the number of shares issued ($10 par x 1,000 sharesissued = $10,000). The 8% dividend rate entitles the preferred stockholders to a dividend of 8%of the preferred stock's par value in the year in which a dividend is declared. Thus, on an annualbasis, preferred stockholders could receive cash dividends of $.80 per share (.08 x $10 par =$.80). In total, preferred stockholders could receive cash dividends of $800 (.08 x $10 par x1,000 shares outstanding = $800). The preferred stockholders would receive the $800 before anycash dividends would be paid to common stockholders. Based on the company's contributed capital, its $2,000 cash dividends would be distributed asfollows. Preferred stock dividends (.08 x $10 par x 1,000 shares) $800
Common stock dividends ($2,000 - $800) $1,200
Total dividends $2,000
Preferred stockholders would receive cash dividends of $.80 per share before dividends would bepaid to common stockholders. This is one of the advantages (preferences) of owning preferredstock. Common stockholders would receive cash dividends of $.12 per share ($1,200 dividends / 10,000 common shares outstanding = $.12). ** You now have the background to do text exercises 12.7, 12.8, and 12.9.Cumulative preferred stock One popular way companies make preferred stock attractive toinvestors is to add the cumulative preference. Remember, preferred stock is issued to obtainresources for management to use. The more attractive the preferred stock is to investors, theeasier it is to obtain resources. The cumulative preference entitles preferred stockholders toreceive dividends before common stockholders, even if the company failed to pay dividends in aprior year. Again, remember that owners receive dividends only after they have been declared bythe board of directors. If dividends are not declared, they cannot be received by owners. Thus,without the cumulative feature, preferred stockholders would not receive dividends for any yearin which the board of directors did not declare them. With the cumulative feature, however,preferred stockholders are guaranteed to receive their dividends for all years before the companycan distribute any dividends to common stockholders. Consider again the $2,000 cash dividend discussed previously. Assume the board of directors didnot declare dividends in the previous year, but instead kept the resources in the company formanagement to use.