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 de year period: 2041, $61,000; 2012, $128,000; 2013, $288,000; 2014, $352,000; 2045, $464,000; and 2076, $560,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 40,000 shares of cumulative, preferred stock. $100 putand 100,000 shares of common stock, $15 par. Required: 1. Determine the total dividends and the per-share dividends dedared on each dass of stock for each of the six years. There were no dividends in arrears at the beginning of 2011. Summarize the data in tabular form. If required, round your answers to two decimal places. If the amount is zero, please entero Preferred Dividends Common Dividends Total Dividends Per Share Total Per Share $ 64,000 Year 2011 2012 2013 2014 2045 2016 128,000 288,000 352,000 464,000 560,000

Answer 1

1) Preferred stock has a preference for dividends distributed by the company. Therefore, the dividend will be first distributed to preferred stockholders.

Amount of dividend for Preferred stock = Value of Preferred stock * Rate of Dividend

= $4,000,000 * 4%

= $160,000

Amount of dividend for Common stock = Total Dividend - Preference dividend

If in any year, the total dividend distributed by the company is less than the amount of preference dividend then the remaining unpaid preference dividend for that year will be distributed by the company in the next year or years.

Year Common Dividend Total Per Share $0 $0 2011 20Y2 20Y3 2014 2015 2016 Total Dividend $64,000 $128,000 $288,000 $352,000 $464,000 $560,000 Preferred Dividend Total Per Share $64,000 $1.60 $128,000 $3.20 $288,000 $7.20 $160,000 $4.00 $160,000 $4.00 $160,000 $4.00 $24.00 $192,000 $304,000 $400,000 $0 $1.92 $3.04 $4.00

In year 20Y1 & 20Y2, dividend distributed by the company is less than the amount of preference dividend. Therefore, the unpaid dividend of both the years $128,000 i.e. $96,000 ($160,000 - $64,000) for 20Y1 and $32,000 ($160,000 - $128,000) will be paid in year 20Y3. Total preference dividend paid by the company in year 20Y3 is $160,000 + $128,000 = $228,000.

2) Average annual dividend for the preferred stock for 6 year period = $24 / 6

= $4

Average annual dividend for the common stock for 6 year period = $9 / 6

= $1.5

3) Average annual percentage return on shareholders investment based on average annual dividend per share

= Average annual dividend per share / Market price per share

Return on preferred stock = $4 / $227

= 1.76%

Return on common stock = $1.5 / $20

= 7.5%