The outstanding share capital of Meadowcrest Corporation consists of 3,000 preferred shares and 7,000 common shares for which $280,000 was received. The preferred shares carry a dividend of $7 per share and have a $100 stated value.

Instructions

Assuming that the company has retained earnings of $95,000 that is to be entirely paid out in dividends and that preferred dividends were not paid during the two years preceding the current year, state how much each class of shares should receive under each of the following conditions.

a. The preferred shares are non-cumulative and non-participating.

b. The preferred shares are cumulative and non-participating.

c. The preferred shares are cumulative and participating. Do not round intermediate calculations but round answers to the nearest dollar.

d. Assume that Meadowcrest's current year net income was $90,000. Calculate the current year payout ratio under each of the conditions above. Round to two decimal places. Comment on the results of your analysis from the perspective of a potential investor.