Holiday.com prepared the following shareholders’ equity section as of December 31, 2014.
Shareholders’ Equity
Share Capital:
Preferred Shares, 5%, 5,000 shares authorized,
400 shares issued and outstanding ....... $ 40,000
Common Shares, 20,000 shares authorized,
5,000 shares issued and outstanding ........ 120,000
Total Share Capital .............. $160,000
Retained Earnings .............. 90,000
Total Shareholders’ Equity ........... $250,000
Answer the following questions about Holiday.com’s dividends:
1. How much in dividends must Holiday.com declare each year before the common shareholders get any cash dividends for the year?
2. Suppose Holiday.com declares cash dividends of $20,000 for 2014. How much of the dividends goes to preferred? How much goes to common?
3. Are Holiday.com’s preferred shares cumulative or noncumulative? How can you tell?
4. Suppose Holiday.com passed the preferred dividend in 2015 and 2016. In 2017, the company declares cash dividends of $9,000. How much of the dividends goes to preferred? How much goes to common?