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, $20,000; Year 2, $40,000; Year 3, $90,000; Year 4, $115,000; Year 5, $140,000; and Year 6, $175,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 25,000 shares of cumulative preferred 2% 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 arrears at 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		$   20,000				$				$				$				$
Year 2		40,000
Year 3		90,000
Year 4		115,000
Year 5		140,000
Year 6		175,000
										$								$

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 $160 for the preferred stock and $16 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

1. Computation of Total dividend and per share dividend
Year	Total dividend (a)	Preference dividend (b)	Common dividend (a-b)	Dividend per preference share***	Dividend per common share **
1	$20,000	$20,000	$0	$0.80	$0.00
2	$40,000	$40,000	$0	$1.60	$0.00
****3	$90,000	$90,000	$0	$3.60	$0.00
4	$115,000	$50,000	$65,000	$2.00	$0.65
5	$140,000	$50,000	$90,000	$2.00	$0.90
6	$175,000	$50,000	$125,000	$2.00	$1.25
	Total			$12.00	$2.80

Note:
*Preference dividend per year = 25000*$100*2%= $50000
**Dividend per Common Share= Common Dividend/ No. of Common Share
***Dividend per Prefrence Share= Prefrence Dividend / No. of Preferred Share
****Preference dividend for the 3rd year includes arrear dividend of $30000 for the 1st year and $10000 for Second year

2. Computation of Average Annual Dividend per Share

Preferred shares = Sum of Total Prefrence share dividend /No. of Year

=$12/6=$2

Common shares = Sum of Total Common share dividend for six year /No. of Year

=$2.80/6=$0.47

3. Computation of Average Annual Percentage Return

Preferred shares = Average Annual Preferred dividend per share /Market Price

=$2/160 X100= 1.25%

Common shares = Average Annual Common dividend per share /Market Price

=$0.47/16 X100 =2.94%