Dividends are a distribution of earnings that management pays to shareholders. Based off earnings, future spending requirements and stockholder complacency, management will determine how much of earnings they want to distribute for the period. This number can vary each distribution depending on management's goals. Dividend distribution is tricky when dealing with participating preferred and common stock.
- Skill level:
Multiply the par value of preferred stock by the number of shares of stock and the per cent of participation. For example, Firm A has 50,000 shares of 60p participating 10 per cent preferred stock: 50,000 x 60p x 10 per cent = £3,250.
Multiply the par value of common stock by the number of shares of stock and the per cent of participation of the preferred stock. For example, Firm A has 200,000 shares of 60p common stock: 200,000 x 60p x 10 per cent = £13,000.
Subtract the distributions calculated in steps 1 and 2 from the total cash dividend to arrive at the remaining distributions. For example, Firm A has £65,000 of dividends to distribute: £65,000 - £13,000 - £3,250 = £48,750 of dividends to distribute.
Divide the total preferred stock price by the total price, then multiply by the dividends to distribute. For example, 50,000 shares x 60p / £162,500 x 60p = 0.2. Then multiply 0.2 by £48,750, which equals £9,750.
Divide the total common stock price by the total price, then multiply by the dividends to distribute. For example, 200,000 shares x 60p / £162,500 x 60p = 0.8. Multiply 0.8 by £48,750, which equals £39,000.
Total the amount distributed of preferred stock. In the example, £3,250 + £9,750 = £13,000 of dividends to the preferred stock.
Total the amount distributed to common stock. In the example, £13,000 + £39,000 = £52,000 of dividends to the common stock.
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