1. Two basic classes of stock
Example Exercise 1
Corporations
A corporation is a separate legal entity that can sell shares of ownership called stock. Stockholders who own the stock own the corporation.
Two basic classes of stock
A corporation is a separate legal entity that can sell shares of ownership called stock. Stockholders, or shareholders, who own the stock own the corporation. There are two basic classes of stock: [CLICK] Common Stock and [CLICK] Preferred Stock. When a corporation has only one type of stock issued, it is common stock. Stock that has various preference rights such as a preference to dividends is called preferred stock.
Common Stock
Preferred Stock

2. Example Exercise 1 Types of Preferred Stock
Cumulative preferred stock has the right to received dividends not declared or paid in prior years
Noncumulative preferred stock does not have this right
The dividends not paid in prior years are said to be in arrears and must be paid before any common stock dividends are paid.
Dividends are distributions of a corporation’s earnings. The payment of dividends is authorized by the corporation’s board of directors. When authorized, the director’s have declared a dividend. The different types of preferred stock include preferences as to dividends. [CLICK] Cumulative preferred stock has a right to receive regular dividends that were not declared or paid in prior years. [CLICK] Noncumulative preferred stock does not have this right. [CLICK] The dividends not paid in prior years are said to be in arrears and must be paid before any common stock dividends are paid.

3. Example Exercise 1 1 20,000 shares x $100 par x 1% $20,000
Year 1 dividends declared ,000
Dividends in arrears for year 1 $10,000
In this example exercise, Sandpiper Company has 20,000 shares of 1 percent cumulative preferred stock with a $100 par and 100,000 shares of $50 par common stock. We need to determine the dividends per share for the preferred and common stock for each year given. First, let’s determine how much is owed for dividends on the preferred stock by multiplying 20,000 shares by the par value of $100 times 1 percent. [CLICK] $10,000 of dividends were declared for Year 1. [CLICK] Therefore, there are $10,000 dividends in arrears for year 1. [CLICK] Since the company didn’t declare enough dividends to satisfy the preferred dividend requirements for this year, the common shareholders received nothing [CLICK].

4. Example Exercise 1 1 Year 2 dividends declared $45,000
20,000 shares x $100 par x 1% plus $10,000 in arrears from year ,000
Remainder to common shareholders $15,000
For year 2, the firm declares dividends of $45,000. [CLICK] Again, the preferred shareholders are entitled to the current year’s dividends of $20,000 plus they will receive the $10,000 in arrears from year 1. [CLICK] This leaves $15,000 for the common shareholders. [CLICK] Let’s compare Year 1 against Year 2 [CLICK]

5. Example Exercise 1 1 Year 3 dividends declared $80,000
20,000 shares x $100 par x 1% 20,000
Remainder to common shareholders $60,000
For Year 3, the firm declares dividends of $80,000. [CLICK] Again, the preferred shareholders are entitled to the current year’s dividends of $20,000. [CLICK] This leaves $60,000 for the common shareholders. [CLICK] This is the first year that the total common dividend has been greater than the total preferred dividend. [CLICK]

6. Example Exercise 1 1 $10,000 ÷ 20,000 shares = $0.50 per share
But wait, we’re not done yet. We need to determine the dividends per share [CLICK] for the preferred and common stock for each year. This is calculated by dividing the total dividends paid by the number of shares for each year. For preferred dividends for year 1, the dividends per share would be $10,000 divided by 20,000 shares, or 50 cents per share. [CLICK] There weren’t any dividends paid to the common shareholders so the per share amount is none for the common stock. Similar allocations are done for Years 2 and 3.
$10,000 ÷ 20,000 shares = $0.50 per share

7. Example Exercise 1 1  For Practice: PE 1A, PE 1B 1
Refer to Practice Exercises PE 1A and PE 1B to practice on determining dividends per share.
1A, 1B
 For Practice: PE 1A, PE 1B