Question

Pecan Theatre Inc. owns and operates movie theaters throughout Florida and Georgia. Pecan Theatre has declared the following annual dividends over a six-year period: 20Y1, $32,000; 20Y2, $64,000; 20Y3, $152,000; 20Y4, $176,000; 20Y5, $224,000; and 20Y6, $288,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 20,000 shares of cumulative, preferred 4% stock, $100 par, and 100,000 shares of common stock, $25 par.

Required:

1. Determine the total dividends and the per-share dividends declared on each class of stock for each of the six years. There were no dividends in arrears at the beginning of 20Y1. Summarize the data in tabular form. If required, round your answers to two decimal places. If the amount is zero, please enter "0".

						Preferred Dividends								Common Dividends
Year		Total Dividends				Total				Per Share				Total				Per Share
20Y1		$   32,000				$				$				$				$
20Y2		64,000
20Y3		152,000
20Y4		176,000
20Y5		224,000
20Y6		288,000
										$								$

2. Determine the average annual dividend per share for each class of stock for the six-year period. If required, round your answers to two decimal places.

Average annual dividend for preferred	$ per share
Average annual dividend for common	$ per share

3. Assuming a market price per share of $247 for the preferred stock and $30 for the common stock, determine the average annual percentage return on initial shareholders’ investment, based on the average annual dividend per share (a) for preferred stock and (b) for common stock.

Round your answers to two decimal places.

Preferred stock	%
Common stock	%

Answer 1

The preferred dividend is 20,000*0.04*100 = $80,000 annually. Any unpaid portion will be in arrears and must be paid before any common holders in the subsequent years also.

1. Summary of the data in tabular form:

In the year 20Y1, net income for distribution was $32,000 whereas the preferred dividend was $80,000, therefore, unpaid dividend of ($80,000 - $32,000) = $48,000 will be carried forward.

In the year 20Y2, net income for distribution was $64,000 whereas the preferred dividend was $128,000 ($80,000 + $48,000 arrear), therefore, unpaid dividend of ($128,000 - $64,000) = $64,000 will be carried forward.

In the year 20Y3, net income for distribution was $152,000 whereas the preferred dividend was $128,000 ($80,000 + $64,000 arrear), therefore, $128,000 will be paid and nothing will be in arrear.

		Preferred Dividends	Common Dividends
Year	Total Dividends	Total	Per share	Total	Per share
	A	B	C=B/20,000 shares	D=A-B	E=D/100,000 shares
20Y1	$32,000	$32,000	$1.60	$0	$0.00
20Y2	$64,000	$64,000	$3.20	$0	$0.00
20Y3	$152,000	$144,000	$7.20	$8,000	$0.08
20Y4	$176,000	$80,000	$4.00	$96,000	$0.96
20Y5	$224,000	$80,000	$4.00	$144,000	$1.44
20Y6	$288,000	$80,000	$4.00	$208,000	$2.08
Total			$24.00		$4.56

2. Computation of average annual dividend per share for each class of stock:

Particulars		Preferred Dividends	Common Dividends
Total Dividens in 6 years	A	$24	$4.56
No of years	B	6	6
Average Annual dividend per year	C=A/B	$4	$0.76

3. Computation of average annual dividend per share based on market price:

Particulars		Preferred Dividends	Common Dividends
Average Annual dividend per year	A	$4	$0.76
Market Price	B	$247	$30
Average annual dividend	C=A/B *100	1.62%	2.53%