   Chapter 13, Problem 13.1APR

Chapter
Section
Textbook Problem

Dividends on preferred and common stockPecan 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, $80,000; Year 2,$90,000; Year 3, $150,000; Year 4,$150,000; Year 5, $160,000; and Year 6,$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-Shan: dividends declared one 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, using the following column heading: 1. 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.

1.

To determine

Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

Common stock:
These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation. The dividend payments are not guaranteed and are paid after the payment made to the preferred stockholders.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

A preferred stock may be cumulative and non-cumulative. A cumulative preferred stock implies that a preferred stockholder is entitled to receive dividends for the current year plus any unpaid dividends of the previous years, before the dividends paid to the common stockholders.

Dividend per share:

Dividend per share represents the amount of dividend paid to each shareholders of the business.

To determine: The total dividends and the amount of dividends declared per share for preferred and common stock for each of the six years.

Explanation

Determine the total dividends and the amount of dividends declared per share for preferred and common stock for each of the six years.

 Year Total dividends Preferred dividends Common dividends Total Per share Total Per share 1 $80,000$ 80,000 $0.32$ 0 $0 2$ 90,000 $90,000$ 0.36 $0$ 0 3 $150,000$ 130,000 $0.52$ 20,000 $0.04 4$ 150,000 $100,000$ 0.40 $50,000$ 0.10 5 $160,000$ 100,000 $0.40$ 60,000 $0.12 6$ 180,000 $100,000$ 0.40 $80,000$ 0.16

Table (1)

Working note:

Calculate the amount to be paid as preferred dividend each year...

2.

To determine
The average annual dividend per share for each class of stock for the six-year period.

3.

To determine
The average annual percentage return on initial stockholders’ investment, based on the average annual dividend per share for (A) preferred stock and (B) common stock.

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