Question

Dividends on Preferred and Common Stock

Yosemite Bike Corp. manufactures mountain bikes and distributes them through retail outlets in California, Oregon, and Washington. Yosemite Bike has declared the following annual dividends over a six-year period ended December 31 of each year: 20Y1, $24,750; 20Y2, $10,250; 20Y3, $105,000; 20Y4, $95,000; 20Y5, $115,000; and 20Y6, $130,000. During the entire period, the outstanding stock of the company was composed of 25,000 shares of cumulative preferred 2% stock, $80 par, and 100,000 shares of common stock, $4 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	$24,750				$				$					$				$
20Y2	10,250
20Y3	105,000
20Y4	95,000
20Y5	115,000
20Y6	130,000
									$									$

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

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

3. Assuming a market price of $100 for the preferred stock and $5 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

Solution 1:

Annual preferred dividend = 25000* $80* 2% = $40,000

		Preferred Dividends			Common Dividends
Year	Total Dividends	Total	Per Share	Total Arrears at year end	Total	Per Share
20Y1	$24,750	$24,750	$0.99	$15,250	$0	$0.00
20Y2	$10,250	$10,250	$0.41	$45,000	$0	$0.00
20Y3	$1,05,000	$85,000	$3.40	$0	$20,000	$0.20
20Y4	$95,000	$40,000	$1.60	$0	$55,000	$0.55
20Y5	$1,15,000	$40,000	$1.60	$0	$75,000	$0.75
20Y6	$1,30,000	$40,000	$1.60	$0	$90,000	$0.90
Total		$2,40,000			$2,40,000

Solution 2:

Average annual dividend for preferred stock = ($240000/ 6 years) / 25000 shares = $1.60 per share

Average annual dividend for Common stock = ($240000/ 6 years) / 100000 shares = $0.40 per share

Solution 3:

Preferred stock = Average annual dividend for preferred stock/ Market price of preferred stock = $1.60/ $100 = 1.60%

Common stock = Average annual dividend for Common stock/ Market price of Common stock = $0.40/ $5 = 8.00%