Accounting troubles — Dividends?
Please help me with this accounting problem. I’m not sure how to do the calculations. Don’t worry about fully answering #2, but a few words to lead me in the right direction would be helpful. Thanks!
Wonderful Outboard Watercraft (WOW) Inc. wants to expand to Blanton, Florida and needs cash. Therefore WOW owners are considering offering 30,000 shares of 1% preferred stock of $100 par on the market. Currently the existing stockholders hold 100,000 shares of $50 par common stock. You are (still) their Chief Financial Officer and they ask you to prepare a schedule of what dividends the common and the (new) preferred stockholders would get if WOW sells these proposed preferred shares. You have estimated Income for Yr 1, 2, and 3 and determined that the following amounts could be distributed as dividends:
1. Determine the dividends per share for preferred and common stock for each year.
2. Prepare a brief memo (no more than 120 words) giving the arguments for and against offering this preferred stock. In the memo also briefly mention other methods of obtaining the cash.
Year 1: preferred 1.00 per share : common 0.20 per share
Year 2: preferred 1.00 per share : common 0.60 per share
Year 3: preferred 1.00 per share : common 1.00 per share
The preferred stock earns dividends at a rate of 1% of par value, or $1.00 per share. With 30,000 shares to be issued, this would total $30,000 in preferred dividends to be paid by the company. This amount must be paid before paying dividends to common shareholders, so for each year, the first $30,000 in dividends goes on the preferred stock, the rest on the common stock. Subtract $30,000 from the total dividends to be paid each year, and divide by 100,000 common shares outstanding, you get the dividends per share for the common stock.
2. Some of the things to consider: Issuing preferred stock is one way to obtain necessary financing. The company needs to look out for its real owners, who are the current common stock owners. They would maintain their voting rights, but would take a back seat when dividends are paid. If they are investing for the income, they probably wouldn’t like the idea too much. If they are investing more for the growth potential, they would be in favor of financing, but maybe not financing obtained in this manner. Other methods of obtaining cash:
Issuing bonds — the stockholders maintain full ownership and dividend shares, but the company goes into long-term debt.
Bank loans — same advantages and disadvantages as issuing bonds, but the debt could be either short or long term.
Selling assets — not likely to be an option available to a company that is looking to expand, but they may own something that doesn’t fit into the future plans.