Quiz 11: Corporations: Organization, Stock Transactions, and Dividends

Business

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.

Dividend: Distribution of earnings by a corporation to its shareholders is called as dividend. Dividends are declared and paid by the company to the stockholders of the company, out of the income earned. There are two types of dividend as cash dividend and stock dividend. Preferred Stock Dividend and Common Stock Dividend: Dividends paid to the preferred stockholders is called preferred stock dividend. The stockholders of cumulative preferred stock, has a right to receive regular dividends that were not declared (paid) in prior years. Cumulative preferred stock dividends that have not been paid in prior years are said to be in arrears. Any preferred dividends in arrears must be paid before any common stock dividends are paid. Dividend paid to the common stockholders is called as common stock dividend. Calculate Dividend per share for preferred and common stock for each year as follows: 1 st Year: Triple Z Inc. has 12, 000 shares of Cumulative preferred 2% stock, $150 par and 50,000 shares of $10 par common stock. The company must pay cumulative preferred dividend every year. If cumulative preferred dividend is not paid in one year, the company needs to pay the dividends arrears in the next year along with the preferred dividend of that year. The cumulative preferred dividend of the company is as follows. img Hence, the company has to pay $36,000 as dividend to cumulative preferred stockholders for the first year. But in the first year, the company has paid only $27,000 as dividend which indicates that total amount of $27,000 is paid to cumulative preferred stockholders. The company needs to pay the balance of $9,000 ($36,000 - $27,000) in the next year. No common dividend is paid in the year 1. img Hence, preferred dividend per share is $2.25 per share. 2 nd Year: In year 2, the company has paid $60,000 as dividend. The dividend paid to preferred stockholders is $45,000 ($36,000 of year 2 and $9,000 of Year 1). Common dividend of $15,000 has been paid to common stockholders. img img Balance of dividend after paying preference dividend is paid to common stockholders. Hence, amount of $15,000 is paid to common stockholders. img Hence, preferred stock dividend per share is $3.75 per share and common stock dividend per share is $0.30 per share. 3 rd Year: In year 3, the company has paid $80,000 as dividend. The dividend paid to preferred stockholders is $36,000. The balance of $44,000 is paid to common stockholders as dividend. img img img Hence, preferred stock dividend per share is $3 per share and common stock dividend per share $0.88 per share. 4 th Year: In year 4, the company has paid $90,000 as dividend. The dividend paid to preferred stockholders is $36,000. The balance of $54,000 is paid to common stockholders as dividend. img img img Hence, preferred stock dividend per share is $3 per share and common stock dividend per share is $1.08 per share. Statement of dividend per share as follows: The dividends paid to preferred stockholders and common stockholders, the dividends per share on each class of stock for each of the four years is summarized in the below table. img