Hi, I've been asked to create a table displaying dividends under certain circumstances, like cumulative/noncumulative, and participating/nonparticipating. The cumulative part I've got down, but I can't seem to find any useful information on how to calculate the distribution of the dividends coming from participatory stock. Here's the information I've been given:

Preferred stock (3%)
Common stock $600,000
Dividends $100,000
Have not paid for last 2 years

I'm not looking for all the answers, just a nudge in the right direction. Thanks.

The necessary information isn't here. Participating means they get a share of the "leftovers." i.e. you figure out the preferred required dividend first. Normally, whatever is left over after that all goes to the common stockholders. When the preferred is participating, they get to share part of those left overs, following some rule.

For instance, if the preferred total required dividend per year was $10,000 and you had $50,000 total dividends, then normally common would get the left over $40,000.

But if it was participating and there was a "rule" stating that they get a pro-rated amount of left overs after common stockholders get an amount equal to what preferred got, then the preferred gets their $10,000 first. Then common gets that "amount equal to what preferred got," which was $10,000. Now the leftovers are $30,000. And then that would be pro-rated by shares, whatever those happen to be. So they've "partipated" in what would normally be the common dividends.

It's a little strange and I rarely see this anymore. The information you've presented cannot be complete, because there isn't even full info on the preferred stock to even do that part. So something's definitely missing, and that "rule" would have to exist to do participating.

Thanks a lot for your reply, and you're right, something is missing: apparently I forgot to include the equity of the preferred stock. Let me try again:

Preferred stock $300,000 (3%)
Common stock $600,000
Dividends $100,000
Have not paid for last 2 years

I think the rule to be used in solving the problem is the "equal amount" rule you're talking about, since that's the only rule my book mentions. I have some figures in my notes, I just have no idea how I got them. You mentioned the left over amount being pro-rated. Is it done according to how much equity is in each type of stock? For example, the preferred stock is one-third of the total equity, so does the preferred stock get one-third of the leftovers?

I think the rule to be used in solving the problem is the "equal amount" rule you're talking about, since that's the only rule my book mentions.

I was just making that up. If it's an amount equal to preferred, it might be the same amount per share, rather than the total like I did it. You'd just have to check what the book says.


You mentioned the left over amount being pro-rated. Is it done according to how much equity is in each type of stock? For example, the preferred stock is one-third of the total equity, so does the preferred stock get one-third of the leftovers?

Well, yes, but it's the number of shares, not the dollar amount. i.e. if there were 90,000 total shares and preferred is one third of that, 30,000 shares, then yes. But again, you don't seem to have the info for that. You didn't even list par cause you could figure out shares that way. The stock accounts are always listed at par. i.e. if common stock par is $10 and you sell 1000 shares at par, then that's $10,000. So if you had $10,000 total dollar value and knew par was $10, you could divide backwards to get the number of shares. But you can't do it with only one of the 3 numbers available.

If this is all the info they gave you, you might just have to use the dollar amounts cause I don't know what else you could do. Seems like a chintzy problem.