Answered>Order 8184

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

$800,000

Preferred shares, $2, no par value, 6,000 shares outstanding

150,000

Retained earnings

235,000

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):

1. The preferred shares are non-cumulative.
2. The preferred shares are cumulative.

Required:

1. Determine the total amounts that would be paid to the preferred shareholders and to the common shareholders under the two independent assumptions.
2. brief memo to explain why the dividend per common share was less under the second assumption.
3. 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.