 In this presentation, we're going to take a look at the distribution of dividends between common stockholders and preferred stockholders. This is a common type of book problem and is useful in practice if we're talking about large companies that have preferred stock. Note that if you're talking about a company that is smaller or doesn't have preferred stock, which may very well be the case for many types of companies, then you're not going to have the issue, of course, with the preferred stock. But when you have the preferred stock, then we have to know what the rules are in terms of the preferred stock, meaning what is the preferred stock, why would you want preferred stock, and how is it going to relate to the other stock. Now note, when we think about the ownership of the company, we usually think of common stock ownership because it has voting rights in the company, and that's going to be one of the key components of it. And it's got similar or the same kind of profit sharing rights as all other common stocks. They're all the same. The preferred stock is going to have some type of benefits, and it's more of a, you can think of it as more of kind of like an investment because typically the preferred stock will not have a voting right as the same as the common stock. So they don't have the kind of influence over the company as a common stockholder. What they do get, the reason it's preferred, is because they're going to get their investment back before the common stockholders. In other words, they have more of a guarantee or they get preference to receive payment before the common stockholders. So if there's going to be a distribution, so in other words, the preferred stock will typically have a dividend rate, a par value, and a par value. So what they're going to get then is a fixed dividend if dividends are declared. So the company then still has an option with preferred stocks to declare dividends or not. They say, I'm not going to have any dividends this year. And then the preferred stockholders and the common stockholders would get nothing. But if they declared any dividends, you couldn't give the common stockholders dividends before first giving the dividends to the preferred stock. That's why it's preferred. So they're going to get their money first. So the benefits then, why would you want one or the other? It sounds like preferred stock is always going to be beneficial. But really, they're just going to get a fixed amount if the dividend is higher than that every time. Whereas the common stockholder, if the company does very well, will start to accumulate more. Now, these types of problems are really difficult just to set up kind of a table or a worksheet to figure out how you're going to do this, how you're going to set this up. So I would set up a table like this every time and then work through a problem like this. The dividends declared, how much was actually declared for dividends in each year, then we're going to break it out between the preferred dividends and the common dividends. In order to do that, we know we're going to pay the preferred dividends first. So I'm first going to calculate what the preferred dividend is. If they're going to get the full dividend, what will the preferred dividend be? This will make more sense once we do this. But what would the full dividend be? And then we'll take the preferred stock dividend allocation, which will either be the full dividend calculation that they would get or something less than that if the corporation had declared dividends for something less than the full dividend amount. And then we've got the preferred stock dividends in arrears, which is going to be the dividends that have not yet been paid, meaning if they didn't get their full dividend, then in future years, we owe them that dividend. We don't have to pay it at this point in time, but we owe it in the future and we have to pay it before we pay the common dividends. And then we're going to have the allocation to the common dividends. So once you have a table like this set up, then it doesn't become too difficult to figure this out. It's more difficult to look at a trial balance because we're going to have to look at multiple years here. That's the tricky thing. So we kind of have to just visualize what we're doing and go through multiple years to see what would happen from year to year. And typically in a problem like this, we're going to have a year where the dividend is not big enough to pay off the preferred dividend, have some dividend in arrears in that case, and then we'll pay off the dividend in year two. So let's go through this. We're going to say, first, we're going to say the board of directors declares a $6,000 dividend in year one, and then that should say board, declares a $40,000 dividend in year two. So substantially larger dividend, the board of directors can declare whatever dividend they agree to in any year, as long as there's nothing retained earnings and any kind of restrictions like that. So then we have the common stock where we have a par value of 50, and the number of shares are 4,000 shares outstanding, whereas we have the preferred stock where the dividend rate is 10%, the par value is 110, and the number of shares is 1,000. So the dividends in year one then, we're going to give out 6,000. Now if that 6,000, not 60, now if the preferred dividends are going to get their full dividend, it would be calculated as the 1,000 shares times the par value 110 times the dividend rate of 0.1. They would get the 11,000. So let's do that again here. We're going to say the full dividend, if there was enough to pay it, would be equal to 1,000 shares times the par value times the rate, which is given here. They would get 111,000, but the corporation being able to declare however many dividends they want, they could say zero this year, we're not going to give any dividends out. So they're only going to give out 6,000, which isn't above the 11. So they're only going to get then the full 6,000, even though they're kind of owed 11. So we could use an if then formula if this sell is greater than that, but we'll just type in this number here. And then we've got the preferred stock dividend in arrears then, meaning we're not going to pay the 11,000 this time, but we have to still pay it. It's going to accumulate forwards anything that we didn't pay, and we're going to have to pay it out in the future before the common stock gets anything. So in other words, this is going to equal the 11,000 minus the 6,000, 5,000, and then the common stockholders, the whole 6,000 that was given out was given to the preferred folk. So the common stockholder gets nothing. And this looks very bad for the common stockholder and you're like, well, why would I want a common stock? I want preferred stock. But note that once the dividends get high, if the company starts doing well, which we hope to happen, so the common stockholder is really betting on the company doing well, and the preferred stockholder is having a more conservative just wants a return on investment more so. So if the company does well and gives now given a $40,000 dividend, we're going to say, OK, dividends declared are now $40,000 in year two, companies doing very well. The preferred stock dividend is still maxing out at this 11,000 per year, which remember is the 1,000 shares times the 110 par value times the dividend rate. Whoops, the dividend rate was 10%, 0.1, 10%. So that's the 11,000. So the preferred stock then is going to get that 11,000 of the 40 because the 11,000 is greater, plus they're going to get the dividends that have not been paid in the prior years, the dividends in arrears. So they're going to get the 11 plus the 5. So they're going to get equals the 11 plus the 5 and enter 16,000. So the preferred stock dividend in arrears, then we're just paid off this 5,000. This goes down to zero because now it's been paid off. So in other words, once again, they're going to get the 16,000, which is the 11,000 for this year, plus what was not paid last year, the 5,000, meaning nothing now is owed. And the common stockholders then are going to get the difference of what was declared 40 minus what the preferred dividends got. So this equals the 40 minus the 16. And so now the common stockholders are now starting to make a lot more money. Next year, it's going to get even better for the common stockholders, even if the dividend is the same, because the preferred stockholders only going to get 11,000 from here on out, whereas the common stockholder is going to get whatever the bonus is, whatever it is more than that. So the common stockholders really betting on the company's growth because if the company grows, common stockholders are going to get more and more money. The preferred stockholder is really wanting more security, meaning if the company grows, that's great, but they're not going to get any more return. It will, on the other hand, guarantee or have a better guarantee they're much more likely to get their fixed return. And so that's going to be the difference between the preferred and the common. So just because it says preferred doesn't necessarily mean it's better than common stock. Common stock has the voting rights and it's really betting on the long term preferred means, the reason it's preferred or the term or my interpretation of the reason it's called preferred, is because they get paid first. They get first dibs on the payment, however, that payment will be limited to the preferred payment calculation, whereas the common stockholder has no limit. It's only limited by the success of the company.