Below I have typed up the example given by my teacher on how to calculate dividends. I was told to study this carefully and am a little confused on how these calculations were reached. For the year of 2008 in the example, I see that there is a $10,000 difference between the dividends and the total, and that there is a 10,000 total on common stock. The same happenings occur with the years 2012 and 2013. I am just confused as to how to come up with that total number under preferred stock. If someone can work out these calculations in great detail for me, maybe just for a couple of the years.. I would greatly appreciate this. I can sort of see parts of it, but not completely. Thanks!



Lemonds Corp. manufactures mountain bikes and distributes them through retail outlets in Oregon and Washington. Lemonds Corp. has declared the following annual dividends over a six-year period: 2008, $40,000; 2009, $18,000; 2010, $24,000; 2011, $27,000; 2012, $65,000 and 2013, $54,000. During the entire period, the outstanding stock of the company was composed of 25,000 shares of cumulative, non-participating 6% preferred stock, $20 Par; and 40,000 shares of Common Stock $1 Par.

Preferred Stock Common Stock

Year Dividends Total Per Share Arrears Total Per Share

2008 40,000 30,000 1.20 0 10,000 .25
2009 18,000 18,000 .72 12,000 0 0
2010 24,000 24,000 .96 18,000 0 0
2011 27,000 27,000 1.08 21,000 0 0
2012 65,000 51,000 2.04 0 14,000 .35
2013 54,000 30,000 1.20 0 24,000 .60

The first thing to understand is that Preferred Stock shareholders will receive dividends declared before Common Stock shareholders. Preferred Stock dividends are paid at a fixed rate. You question states that there are 25,000 shares of 6%, $20 par preferred shares. This tells you that there is $500,000 in preferred stock (25,000*20). The dividend rate will be 6% of $500,000, or $30,000. In any year, the Preferred Shareholders will be paid first, up to the amount declared. Dividends in arrears refers to the amount that is owed to preferred shareholders for years where the expected amount ($30,000) could not be paid. Common Stock shareholders will only receive dividends if there is money left over after satisfying the amount owed to Preferred shareholders for the current year and any years in arrears. You can compute the amount per share by dividing the dividend by the number of shares.

In Year 2008, they declared $40,000 in dividends. The Preferred Stockholders receive their dividends of $30,000 leaving $10,000 for the Common Stockholders. The Preferred per share is $30,000/25,000 or $1.20. The Common per share is $10,000/40,000 or $0.25.

In the second year, they declared $18,000. Since this is less than the Preferred are entitled to get, the Preferred get the entire $18,000. In addition, it is cumulative (meaning if they are in arrears, any future dividend will pay the amount in arrears first, their current year portion next, and if there is more left over the Common will be paid dividends). They are in arrears by $12,000.

If you'd like to explain the rest to be sure you understand, we will check it for you.

All right, I think I am following you.. In my teacher's example for year 2012, the total is different than the dividend for the preferred stock. What calculation do I use to get the total? I understand in the first year, but am confused on other years

In year 2012, total is 51,000, while the dividends are 65,000. What calculation is used to find the total? I see that the preferred holders plus the total of common stock equals the dividend total, just don't understand how that 51,000 was computed.

This part of my post explains that:
In addition, it is cumulative (meaning if they are in arrears, any future dividend will pay the amount in arrears first, their current year portion next, and if there is more left over the Common will be paid dividends).

You will notice that in year 2011, the teacher shows you they are a total of $21,000 in arrears. When the dividend of $65,000 is declared in 2012, the preferred stockholders are entitled to be paid the $21,000 in arrears first, the $30,000 in current year dividends second, and finally the balance of $14,000 ($65k-51k) goes to the common stockholders.

Here is my question a council has given the go- ahead for a parking mall to be established alongside the square. The cost of the development will amount to $25 million. There will be 250 parking bay. The company undertaking the development intends charging a fixed charge of $ 2300 per bay per month for the first 10 years of use, and a fixed charge of $ 360 per bay per month indefinitely thereafter. Assume the $ 10 million is due immediately to the building contractor and the balance of $ 15 million is due completion of the mall in a year's time. The required rate of the return of the company is 21% per annum, interest compounded monthly. The on going operating cost per day will be $ 30 per month once the mall is completed. This operation cost is expected to increase by 1% per month indefinitely into the future due to inflation, ignore taxation

Question: use NPV analysis to determine whether the company should go ahead with the parking mall

Separate question

It is one question, the top part is the narration and the question is use NPV analysis to determine whether the company should go ahead with the parking mall??

What I mean is you have added your question to an old thread please submit each new question as a new question