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, $32,000; Year 2, $96,000; Year 3, $152,000; Year 4, $184,000; Year 5, $232,000; and Year 6, $288,000. During the entire period ending December 31 of each year, the outstanding stock of the company was composed of 40,000 shares of cumulative, 2% preferred 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		$   32,000				$				$				$				$
Year 2		96,000
Year 3		152,000
Year 4		184,000
Year 5		232,000
Year 6		288,000
										$								$

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 $112 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

Preference shareholders are paid prior to the common shareholders. Further cumulative shareholders can accumulate the dividend that should have been paid to them, but what was paid. This accumulated dividend still has priority over dividend to common shareholders. Balance dividend is completely available for common share holders.

1)

Preferred Dividends Common Dividends Year Total Dividend Reference Total Per share Total Per share Year 1 $ 32,000.00 $ 32.000.00S 0.80 $ - S - Working Note 1 Year 2 $ 96,000.00 $ 96,000.00 $ 2.40S - S - Working Note 2 Year 3 $ 1.52,000.00 $ 1,12,000.00 $ 2.80 $ 40,000.00 $ 0.40 Working Note 3 Year 4 $ 1,84,000.00 $ 80,000.00 $ 2.00 $ 1,04,000.00 $ 1.04 Working Note 4 Year 5 $ 2,32,000.00 $ 80,000.00 $ 2.00 $ 1,52,000.00 $ 1.52 Year 6 S 2.88.000.00$ 80,000.00 $ 2.00 $2.08,000.00 $ 2.08 $ 4,80,000.00 $ 5,04,000.00

Working Note 1

Year 1 available dividend = $32,000

Annual Dividend to preference share holders = No. of shares x Face Value x Rate = 40,000 x 10 x 2% = $80,000

Annual Dividend actually paid to preference share holders = $32,000

Accumulated preference dividend carried forward to next year = $80,000 - $32,000 = $48,000

Annual Dividend to common share holders = Annual dividend - Preference dividend = $32,000 - $32,000 = $0

Working Note 2

Year 2 available dividend = $96,000

Annual Dividend to preference share holders = No. of shares x Face Value x Rate = 40,000 x 10 x 2% = $80,000

Previous year accumulated preference dividend carried forward = $48,000

Total dividend payable to preference shareholders = $80,000 + $48,000 = $128,000

Annual Dividend actually paid to preference share holders = $96,000

Accumulated preference dividend carried forward to next year = $128,000 - $96,000 = $32,000

Annual Dividend to common share holders = Annual dividend - Preference dividend = $96,000- $96,000 = $0

Working Note 3

Year 3 available dividend = $152,000

Annual Dividend to preference share holders = No. of shares x Face Value x Rate = 40,000 x 10 x 2% = $80,000

Previous year accumulated preference dividend carried forward = $32,000

Total dividend payable to preference shareholders = $80,000 + $32,000 = $112,000

Annual Dividend actually paid to preference share holders = $112,000

Accumulated preference dividend carried forward to next year = Nil

Annual Dividend to common share holders = Annual dividend - Preference dividend = $152,000- $112,000 = $40,000

Working Note 4

Year 4 available dividend = $184,000

Annual Dividend to preference share holders = No. of shares x Face Value x Rate = 40,000 x 10 x 2% = $80,000

Annual Dividend actually paid to preference share holders = $80,000

Accumulated preference dividend carried forward to next year = Nil

Annual Dividend to common share holders = Annual dividend - Preference dividend = $184,000 - $80,000 = $104,000

2) Average annual dividend per share = (Total dividend for six years/ No. of shares) / 6 years

Average annual dividend per preference share = ($4,80,000 / 40,000) / 6 = $2 per share

Average annual dividend per common share = ($5,04,000 / 100,000) / 6 = $0.84 per share

3) Average annual % return on initial investment = (Dividend per share / Cost per share) x 100

Average annual % return on initial investment of preference share = ($2 / $112) x 100 = 1.79%

Average annual % return on initial investment of common share = ($0.84 / $20) x 100 = 4.2%