Love Theater Inc. owns & operates movie theaters throughout New Mexico & Utah. L
ID: 2353905 • Letter: L
Question
Love Theater Inc. owns & operates movie theaters throughout New Mexico & Utah. Love Theatre has declared the following annual dividends over a 6 year period: 2007, $32,000; 2008,$96,000; 2009, $160,000; 2010, $192,000, 2011, $240,000; 2012, $296,000. During the entire period ending Dec 31 of each year, the OUTSTANDING STOCK of the company was composed of 20,000 shares of cumulative 40% preferred stock, $100 par, & 100,000 shares of common stock, $25 par.(a)Calculate the total dividends & per share dividends declared on each class of stock for each of the 6 yeas. There were no dividends in arrears on Jan 1, 2007. Summarize data in tabular form.
(b)Calculate the average annual dividend per share for each class of stock for 6 year period.
(c) Assuming a market price per share of $288 for the preferred stock & $31 for the common stock, calculate the average annual percentage return on initial shareholders investment, based on the average annual dividend per share for preferrd stock & for common stock.
Explanation / Answer
According to the given information, Number of share of preferred stock = 20,000 Par value of preferred stock = $100 Number of share of common stock = 100,000 Par value of common stock = $25 Cumulative preferred dividends is not 40%, it is assumed to be 4%. If it is 40% then the dividend amount for preferred stockholders is coming to $800,000 which is highly impossible. a) Calculating the total dividends and per share dividends for each class of stock: Total value of Preferred stock = 20,000 * $100 = $2,000,000 Cumulative preferreds stock value = 4% ($2,000,000) = $80,000 In the year 2007, there are no dividends in arrears. Therefore, the preferred stockholders should be paid $80,000 each year in dividends. In year 2007, the dividends for preferred stockholders are$80,000. But the dividends declared are $32,000. Therefore, the total dividends $32,000 will be paid to PS (Preferred Stockholders) and the remaining amount $48,000 will be paid in the next year dividends and there are no dividends to common stockholders in the year 2007. In 2008, the dividends for preferred stockholders are $128,000 ($80,000 + $48,000). But the dividends declared are $96,000. Therefore, the total dividends $96,000 will be paid to PS (Preferred Stockholders) and the remaining amount $32,000 will be paid in the next year dividends and there are no dividends to common stockholders in the year 2008. In 2009, the dividends for preferred stockholders are $112,000 ($80,000 + $32,000). But the dividends declared are $160,000. Therefore, the total dividends $112,000 will be paid to PS (Preferred Stockholders) and the remaining amount $48,000 will be paid to common stockholders in the year 2009. In 2010, the dividends for preferred stockholders are $80,000. But the dividends declared are $192,000. Therefore, the total dividends $80,000 will be paid to PS (Preferred Stockholders) and the remaining amount $112,000 will be paid to common stockholders in the year 2010. In 2011,the dividends for preferred stockholders are $80,000. But the dividends declared are $240,000. Therefore, the total dividends $80,000 will be paid to PS (Preferred Stockholders) and the remaining amount $160,000 will be paid to common stockholders in the year 2011. In 2012, the dividends for preferred stockholders are $80,000. But the dividends declared are $296,000. Therefore, the total dividends $80,000 will be paid to PS (Preferred Stockholders) and the remaining amount $216,000 will be paid to common stockholders in the year 2012. Per share preferred dividend = Total preferred Dividends / Number of outstanding preferred shares Per share Common dividend = Total common dividends / Number of outstanding common shares b) Average annual dividend for Preferred stock are: Annual dividend per share for Preferred stock = [$1.60 + $4.80 + $5.60 + $4.00 + $4.00 + $4.00] / 6 = $4 Annual dividend per share for common stock = [ $0 + $0 + $0.48 + $1.12 + $1.60 + $2.16] / 6 = $0.89 c) The market price of preferred stock is $288 and the market price of common stock is $31. Average annual percentage return for Preferred stock = $4 / $288 = 0.0139 or 1.39% Average annual percentage return for Common stock = $0.89 / $31 = 0.0287 or 2.87% Therefore, the annual percentage return for Preferred stock is 1.4% and for common stock is 2.9%Related Questions
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