Question

Dividends on Preferred and Common Stock

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: Year 1, $48,000; Year 2, $96,000; Year 3, $216,000; Year 4, $276,000; Year 5, $336,000; and Year 6, $432,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 40,000 shares of cumulative preferred 3% stock, $100 par, and 100,000 shares of common stock, $10 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 arrearsat the beginning of Year 1. 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
Year 1		$   48,000				$				$				$				$
Year 2		96,000
Year 3		216,000
Year 4		276,000
Year 5		336,000
Year 6		432,000
										$								$

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 $172 for the preferred stock and $15 for the common stock, determine the average annual percentage return on initial shareholders' investment, based on the average annual dividend per share for preferred stock and for common stock.

Round your answers to two decimal places.

Preferred stock	%
Common stock	%

Answer 1

Answer 1.

Preferred Stock:

Par Value per share = $100
Dividend Rate = 3%

Dividend per share = Par Value per share * Dividend Rate
Dividend per share = $100 * 3%
Dividend per share = $3.00

Number of shares outstanding = 40,000

Annual Dividend = Dividend per share * Number of shares outstanding
Annual Dividend = $3.00 * 40,000
Annual Dividend = $120,000

Common Stock:

Number of shares outstanding = 100,000

Answer 2.

Preferred Stock:

Average Annual Dividend per share = Total Dividend per share / 6
Average Annual Dividend per share = $18.00 / 6
Average Annual Dividend per share = $3.00

Common Stock:

Average Annual Dividend per share = Total Dividend per share / 6
Average Annual Dividend per share = $6.84 / 6
Average Annual Dividend per share = $1.14

Answer 3.

Preferred Stock:

Return on Initial Shareholders’ Investment = Average Annual Dividend per share / Market Price per share
Return on Initial Shareholders’ Investment = $3.00 / $172.00
Return on Initial Shareholders’ Investment = 1.74%

Common Stock:

Return on Initial Shareholders’ Investment = Average Annual Dividend per share / Market Price per share
Return on Initial Shareholders’ Investment = $1.14 / $15.00
Return on Initial Shareholders’ Investment = 7.60%