Quiz 13: Corporations:organization,capitalstocktransactions,and Dividends


Board of directors: The board consists of directors appointed by members. They represent the whole shareholders and they play key role in decision making. The decision of the Board has to be viewed from the following aspects: • The Board of director's approvals. • The board of directors has oversight CEO satiation and possibility for agreeing to lend 400 million $2.5% • The company can make this $400 million as assets if the cost of capital of the company is less than 2.5% • The board of directors does not care the stock holder's fund. • Whether the sale of stock to outsiders would have affected the management of the company. If so the decision taken is in the interest of the company. • Whether the loan has been properly secured. If so the decision of the board is in the interest of the company. • Whether the value of stock is properly evaluated against the loan given.

Investment decision making: When the funds are to be invested by the prospective investors, then it is required to analyze the return from the investment to be made in terms of the current income. If the return from the proposal is more than the current income, the investment will be made otherwise reject the proposal. Par value of share does not provide any indication about the stock that which one is preferable for investment purpose. It is not correct to state that common stock with higher par value is better than common stock with lower par value common stock. For example: Two companies are issuing common stock. First company has issued 100 shares with par value of $10 and second company has issued 10 shares with par value of $100. The resultant value of common stock will be $1,000, whether issued by first company or second company. It shows it will not impact the decision related to investment.

Calculation of dividend per share: Total preferred capital -30,000 shares ×$90 per share Total preferred capital -$ 2,700,000 Total dividends for preferred stockholder -$ 2,700,000×2% Total dividends for preferred stockholder- $ 54,000 But, in the first year the company declared only $ 24,000 as dividends. The amount is not sufficient to pay the dividends to preference share holders. Since the shares are cumulative preference shares, the balance dividends can be paid in the next year along with the next year's dividends. Under cumulative preference shares, the unpaid dividend is accumulated till it is paid. Every year each preferred stock gives to its holders a dividend of $ 1.80 ($90 ×0.02) In the first year dividend per preferred stock - $ 24,000 ÷30,000 shares - $ 0.80 per share Total Common capital -125,000 shares × $10 per share Total Common capital -$ 1,250,000 Wallace Inc. first should pay the dividends to cumulative preferred stockholders @2%. The balance amount has to be paid as dividends to common stockholders. In the first second yeas there are no dividends to the common stockholders. Table showing the dividend per share img Working note: 1 st year declaration of dividends : $ 24,000 Dividends to be paid to preferred stockholders : $ 54,000 Balance to be paid in the next year : $ 30,00 0 2 nd year, declaration of dividends : $ 81,000 Less 1 st year's arrears : $ 30,000 Balance amount available for 2 nd year's dividend : $ 51,000 Less: Dividends to be paid to preferred stockholders: $ 54,000 Balance to be paid in the next year : $ 3,000 3 rd year, declaration of dividends : $ 92,000 Less: 2 nd year's arrears to preferred stockholders : $ 3,000 Balance amount available for 3 rd year's dividends : $ 89,000 Less: Dividends to be paid to preferred stockholders: $ 54,000 Amount available to common stockholders : $ 35,000 4 th year, declaration of dividend : $139,000 Less: Preferred stockholders dividend : $ 54,000 Amount available to equity shareholders : $ 85,000