Question

chap 12 - 01

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, $40,000; Year 2, $80,000; Year 3, $190,000; Year 4, $220,000; Year 5, $290,000; and Year 6, $350,000. 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 4% stock, $100 par, and 100,000 shares of common stock, $15 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		$   40,000				$				$				$				$
Year 2		80,000
Year 3		190,000
Year 4		220,000
Year 5		290,000
Year 6		350,000
										$								$

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 $313 for the preferred stock and $20 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

Solution 1:

Annual preferred dividend = 25000*$100*4% = $100,000

		Preferred Dividends			Common Dividends
Year	Total Dividends	Total	Per Share	Total Arrears at year end	Total	Per Share
Year 1	$40,000	$40,000	$1.60	$60,000	$0	$0.00
Year 2	$80,000	$80,000	$3.20	$80,000	$0	$0.00
Year 3	$1,90,000	$1,80,000	$7.20	$0	$10,000	$0.10
Year 4	$2,20,000	$1,00,000	$4.00	$0	$1,20,000	$1.20
Year 5	$2,90,000	$1,00,000	$4.00	$0	$1,90,000	$1.90
Year 6	$3,50,000	$1,00,000	$4.00	$0	$2,50,000	$2.50
Total		$6,00,000			$5,70,000

Solution 2:

Average annual dividend for preferred = (Total Dividend paid / number of years) / Preferred shares = ($600,000 / 6) / 25000

= $4 per share

Average annual dividend for common = (Total Dividend paid / number of years) / Common shares = ($570000 / 6) / 100000

= $0.95

Solution 3:

Preferred stock = Average annual dividend for preferred per share / Market price = $4 / $313 = 1.28%

Common stock = Average annual dividend for Common per share / Market price = $0.95 / $20 = 2.85%