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: Year 1, $16,000; Year 2, $32,000; Year 3, $112,000; Year 4, $122,000; Year 5, $134,000; and Year 6, $148,000. 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 2% stock, $100 par, and 100,000 shares of common stock, $20 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 Year 1. Summarize the data in tabular form. Note: If required, round your answers to two decimal places. If the amount is zero, enter "0". Preferred Dividends Common Dividends Year Total Dividends Total Per Share Total Per Share Year 1 $ 16,000 $ $ $ $ Year 2 32,000 Year 3 112,000 Year 4 122,000 Year 5 134,000 Year 6 148,000 $ $ 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 $120 for the preferred stock and $14 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. Use the rounded amounts from part 2 in future computations. And round your final answers to two decimal places. Preferred stock % Common stock % Feedback 1. Is the preferred stock cumulative or non-cumulative? How will the preferred stock being cumulative or non-cumulative affect the distribution of dividends? Determine what amount of current dividends the preferred stock should receive per year. Recall the definition of dividends "in arrears". How much in dividends would each share of preferred stock receive each year? How much in dividends would each share of common stock receive each year? 2. Remember you are calculating the average per share for each class of stock, not in total. 3. What would the preferred and common stockholder receive as a return on their initial investment based on the average annual dividend? Learning Objective 2.

Answer 1

Requirement 1

Is the preferred stock cumulative or non-cumulative?

Ans: .As per the Data provided Preferred Stock in Cumulative.

How will the preferred stock being cumulative or non-cumulative affect the distribution of dividends?

Ans : For holders of cumulative preferred stock, the dividends owed continue to accumulate until they are paid. All dividends owed to holders of cumulative preferred shares must be paid before holders of noncumulative preferred and common stock can receive dividends.

Noncumulative preferred does not accumulate unpaid dividends, but its dividends are paid ahead of common stock, after any accumulated dividend obligations have been paid to holders of the cumulative preferred.

Determine what amount of current dividends the preferred stock should receive per year. Recall the definition of dividends "in arrears". How much in dividends would each share of preferred stock receive each year?

Ans : Dividend in Arrears generally refers to a situation when Company fails to turn the substantial enough Profit to pay the dividend guaranteed to its Cumulative Preferred Stockholder.

Cumulative preferred stock entitled to $40,000 dividend each year

Explanation :

$ 100 Par * 2 % * 20000 share = $ 40,000 each year

How much in dividends would each share of common stock receive each year?

Ans: Holders of common stock are not necessarily guaranteed a dividend. The company can simply choose not to pay any dividends in a given quarter or year. Dividend to Common stockholder depends upon the total dividend declared, amount of dividend paid to Preferred Stockholder and if any balance is still left then the dividend will be paid to the Common Stockholder.

Calculate 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 Year 1.

Year	Total Dividend	Total	Per share	Total	Per share
Year 1	$ 16,000	$ 16,000	$ 0.80	$ 0	$ 0
Year 2	$ 32,000	$ 32,000	$ 1.60	$ 0	$ 0
Year 3	$ 112,000	$ 72,000	$ 3.60	$ 40,000	$ 0.40
Year 4	$ 122,000	$ 40,000	$ 2.00	$ 82,000	$ 0.82
Year 5	$ 134,000	$ 40,000	$ 2.00	$ 94,000	$ 0.94
Year 6	$ 148,000	$ 40,000	$ 2.00	$ 108,000	$ 1.08
Total	$ 564,000	$ 240,000	$ 12.00	$ 324,000	$ 3.24

Explanation:

Since Cumulative Preferred Stockholder are entitled to $ 40,000 Dividend each year. But Company has declared dividend of $ 16,000 in first year and hence

Dividend in Arrears = $ 24,000 ( $40,000 - $16,000)

For Year 2

Total Dividend Distributed = $ 32,000

Divedend in Arrears for Year 2 = $ 8,000 ($ 40,000 - $ 32,000 )

Cumulative Dividend in Arears = $ 32,000 ($ 24,000 + $ 8,000)

For Year 3

Total Dividend Distributed = $ 112,000

Dividend Paid to Preferred stock for Year 3 = $ 40,000

Divindend in Arrears also paid to Preferred Stockholder = $ 32,000

Total Dividend Paid to the Preferred Stockholder = $72,000 ( $ 40000 + $32,000 )

And Balance i.e. of $ 40, 000 ( $ 112,000 - $ 72,000 ) is paid to common Stockholder

Year 4 ,

Total Dividend = $ 122,000

Preferred Stockholder are Paid $ 40, 000 and Balance i.e. $ 82 000 ( $122,000 - $ 40, 000) is paid to Common Stockolder

For Year 5 and Year 6 Dividend is calculated in similar fashion.

Requirement 2

Calculate the average annual dividend per share for each class of stock for the six-year period.

Average Annual Dividend for Preffered Stock = Dividend per share / Total no of years

= $ 12 / 6

= $ 2

Average Annual Dividend for Common = Dividend per share / Total no. of years

= $ 3.24 / 6

= $ 0.54

Requirement 3

Assuming a market price per share of $120 for the preferred stock and $14 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.

Average Annual Percentage Return on Preferred Stock = Average Anual Dividend / Market Price * 100

= $ 2 / $120 * 100

= 1.67 %

Average Annual Percentage Return on Common Stock = Average Anual Dividend / Market Price * 100

= $ 0.54 / $14 * 100

= 3.86 %