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: 20Y1, $32,000; 20Y2, $64,000; 2013, $144,000; 20Y4, $184,000; 20Y5, $232,000; and 2016, $280,000. 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 2% stock, $100 par, and 100,000 shares of common stock, $20 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 2011. 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 Total Dividends Year Total Per Share Total Per Share 20Y1 $ 32,000 $ 32,000 $ 0 0 0.80 1.60 20Y2 64,000 64,000 0 0 20Y3 144,000 133,000 3.32 10,000 0.10 0.84 2014 184,000 100,000 2.5 84,000 132,000 2015 232,000 100,000 1.32 2016 280,000 100,000 2.5 180,000 1.80 $ 13.22 4.06

Answer 1

Requirement (1)

Computation of Fixed Dividend on preferred stock per year:

(i)	No. of Cumulative preferred stock	40000
(ii)	Par value per stock	100
(iii)	Fixed Dividend rate per preferred stock	2%
(iv)	Therefore, Dividend per preferred stock	2	(ii) * (iii)
(v)	Therefore, Total Dividend on preferred stock per year	80000	(iv) * (i)

Statement of Distribution of profits into Preferred dividend, Preferred dividend arrears and common dividend:

Year	Total Dividend	Preference dividend Due (i.e Fixed + Arrears)	Preference dividend Paid		Preference dividend arrears		Common dividend
			Total	Per share	Total	Per share	Total	Per share
20Y1	32000	80000	32000	0.8	48000	1.2	0	0
		(80000 + 0)			(80000 - 32000)
20Y2	64000	128000	64000	1.6	64000	0.4	0	0
		(80000 + 48000 (arrears)			(128000 - 64000)
20Y3	144000	144000	144000	3.6	0	0	0	0
		(80000 + 64000 (arrears)
20Y4	184000	80000	80000	2	0	0	104000	1.04
20Y5	232000	80000	80000	2	0	0	152000	1.52
20Y6	280000	80000	80000	2	0	0	200000	2
Total				12.00				4.56

Requirement (2)

Annual Average Dividend for Preferred = 12 / 6 = 2.00 per share
Annual Average Dividend for Common = 4.56 / 6 = 0.76 per share

Requirement (3)

Average Annual Return on Initial Investment (based on book values) = (Average dividend / Book value of price per share ) * 100

For Preferred = (2 / 100) * 100 = 2%
For Common = (0.76 / 20) * 100 = 3.8%

Alternatively, the Return on investment can be based on the market values.
Therefore, Average Annual Return on Initial Investment (Market values) = (Average dividend / Market value of price per share ) * 100

For Preferred = (2 / 164) * 100 = 1.22%
For Common = (0.76 / 26) * 100 = 2.92%