E11-8 Computing Dividends on Preferred Shares, and Analyzing Differences
This is the question which I am stuck on.
The records of Hoffman Company reflected the following balances in the shareholders’ equity accounts at December 31, 2017:
Common shares, no par value, 40,000 shares outstanding
Preferred shares, $2, no par value, 6,000 shares outstanding
On September 1, 2018, the board of directors was considering the distribution of a $62,000 cash dividend. No dividends were paid during 2013 and 2017. You have been asked to determine dividend amounts under two independent assumptions (show computations):
- The preferred shares are non-cumulative.
- The preferred shares are cumulative.
- Determine the total amounts that would be paid to the preferred shareholders and to the common shareholders under the two independent assumptions.
- brief memo to explain why the dividend per common share was less under the second assumption.
- Why would an investor buy Hoffman’s common shares instead of its preferred shares if they pay a lower dividend per share? Explain. The market prices of the preferred and common shares were $25 and $40, respectively, on September 1, 2018.