Dividend Calculations
Response to the following problem:
Lowe Corporation had authorization for 80,000 shares of 8% preferred stock, par value $20 per share, and 24,000 shares of common stock, par value $120 per share, all of which are issued and outstanding. During the years beginning in 2008, Lowe Corporation maintained a policy of paying out 50% of net income in cash dividends. One-half the net income for the three years beginning in 2008 was $50,000, $280,000, and $340,000. There are no dividends in arrears for years prior to 2008.
Required:
Compute the amount of dividends paid to each class of stock for each year under the following separate cases:
1. Preferred stock is noncumulative.
2. Preferred stock is cumulative.
3. Interpretive Question: Why is it important that a common stockholder know about the dividend privileges of the preferred stock?