[nalratoss]

Even with the answer explanation, I am still at a loss. Where did the 5% return on common stock come out of? And where in the book did they mention aggregate par value? Aren’t dividends distributed in the order of PS dividend in arrears—PS dividend in current years—CS dividend in current years? Take 100000 – 30000 * 5% * 10 = 85000. Tada, can’t find the answers!

Arp Corp.’s outstanding capital stock at December 15, Year 4, consisted of the following:
30,000 shares of 5% cumulative preferred stock, par value $10 per share, fully participating as to dividends. No dividends were in arrears.
200,000 shares of common stock, par value $1 per share
On December 15, Year 4, Arp declared dividends of $100,000. What was the amount of dividends payable to Arp’s common shareholders?

A $34,000
B $40,000
This answer is correct.
The stated rate of dividends must be paid to preferred shareholders before any amount is paid to common shareholders. Given no dividends in arrears, this amount is $15,000 (30,000 shares × $10 par × 5%). The preferred stock will also participate equally in the cash dividend after a 5% return is paid on the common. The basic return to common shareholders is $10,000 (200,000 shares × $1 par × 5%). The remaining $75,000 ($100,000 – $15,000 – $10,000) will be shared in proportion to the par values of the shares outstanding.
The aggregate par value of the preferred is $300,000 (30,000 shares × $10 par). The aggregate par value of the common is $200,000 (200,000 shares × $1 par). The distribution will therefore be in the ratio of 3:2, and $45,000 ($75,000 × 60%) is the participating share of the preferred shareholders. The balance of $30,000 ($75,000 – $45,000) will be paid to the common shareholders. The total dividends on the common stock is $40,000 ($10,000 + $30,000).

C $10,000
D $47,500

This is the diagnostic quiz part. I always randomly guess answers here as it is impossible to do the diagnostic quiz without reading Gleim. If I read first, what’s the point of “diagnostic”? lol

 

 

[Anonymous]

You should have been tipped off by the key words fully participating.

It means that preferred share holders get to participate in extra dividends after the preffs get their guaranteed dividends(think a bond with guaranteed interest), then the common share holders get the same percentage, then the rest is allocated(similar to bundled assets purchases: think land and a building)

So Preffs get 5%..like interest. the 5% is 5% of the par amount per share times shares outstanding.
Common stock gets 5% based on their par value.
Allcoate the remainder based on shares of preffereds/total shares * (Dividends declared- Preffs initial dividends divdidends- initial common stock dividend allocation)

It would have been a little messier had dividends been in arrears.

Hope that maes a little sense..cheers!

[nalratoss]

@cessnapilot30 Thanks. I read the book again and found a short 2-3 line paragraph tipping off the “full participating” concept.

Can't believe a short 2-3 line paragraph is being tested 🙁

[Anonymous]

Such is the minutiae of the exam..Like I've said before on here, the exam is too broad to make it super complex. but it's all about attention to the small details.

Can't tell you how many random, middle of the page in Becker concepts I've seen. definitely not the headliner ballbusters like leasing under IFRS or something gnarly..The simple concepts that get overlooked.

keep at it, you'll get there.

[Matt]

Just reading this one helped me out a good bit. Thanks @cessnapilot30.

FAR 74

[Author]

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