Question

PR 12-1A Dividends on preferred and common stock Obj. 2 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: 20Y1, $80,000; 20Y2, $90,000; 20Y3, $150,000; 20Y4, $150,000; 20Y5, $160,000; and 20Y6, $180,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 250,000 shares of cumulative, preferred 2% stock, $20 par, and 500,000 shares of common stock, $15 par. Instructions 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, using the following column headings: Year Total Dividends Preferred Dividends Common Dividends Total Per Share Total Per Share 20Y1 $ 80,000 20Y2 90,000 20Y3 150,000 20Y4 150,000 20Y5 160,000 20Y6 180,000 2. Determine the average annual dividend per share for each class of stock for the six-year period. 3. Assuming a market price per share of $25.00 for the preferred stock and $17.50 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.

Answer 1

The table shows the total dividends and per-share dividends declared for each class of stock over a six-year period. The average annual dividend per share is calculated for each class of stock. Finally, the average annual percentage return on investment is determined for the preferred stock and common stock based on the average annual dividend per share.

Step-by-step explanation:

Total Dividends and Per-Share Dividends:

Year Total Dividends Preferred Dividends Common Dividends

20Y1 $80,000 $10,000 $70,000

20Y2 $90,000 $10,000 $80,000

20Y3 $150,000 $10,000 $140,000

20Y4 $150,000 $10,000 $140,000

20Y5 $160,000 $10,000 $150,000

20Y6 $180,000 $10,000 $170,000

Average Annual Dividend per Share:

Preferred Stock: $10,000 / 250,000 shares = $0.04 per share

Common Stock: $ (Total Dividends - Preferred Dividends) / 500,000 shares

Average Annual Percentage Return on Investment:

(a) For Preferred Stock: ($0.04 / $20) × 100 = 0.2%

(b) For Common Stock: ($ (Total Dividends - Preferred Dividends) / $15) × 100

Answer 2

To calculate dividends on preferred and common stock, we must first allocate the annual 2% dividend on the 250,000 shares of preferred stock with a $20 par value, then distribute any remaining dividends to common shareholders. The average dividend per share is then calculated over a six-year period, and the average annual percentage return is determined based on the market price per share.

Step-by-step explanation:

Calculating Dividends on Preferred and Common Stock

The student has been asked to determine dividends for a company with both preferred and common stock over a six-year period. Considering that the preferred stock is cumulative and has a 2% dividend rate with a $20 par value, and there are 250,000 shares, we first calculate the preferred dividends which would be $100,000 annually (2% of $20 is $0.40 per share and with 250,000 shares that's $100,000). Whatever remains from the total dividend after paying preferred shareholders would then go to the common shareholders.

For example, in 20Y1 with $80,000 in total dividends and $100,000 required for preferred dividends, no dividends would go to common shareholders as there are dividends in arrears for preferred shareholders. This scenario repeats in 20Y2. Starting from 20Y3, the total dividends exceed the preferred portion, and thus the remaining can be distributed to common shareholders.

To determine the average annual dividend per share for each class of stock over the six-year period, add all dividends paid per share and divide by six. For the average annual percentage return, divide the average annual dividend per share by the market price per share and multiply by 100.