Love Theatre Inc. owns and operates movie theaters throughout New Mexico and Uta

Question

Love Theatre Inc. owns and operates movie theaters throughout New Mexico and Utah. Love Theatre has declared the following annual dividends over a six-year period: 2009, $40,000; 2010, $120,000; 2011, $180,000; 2012, $230,000; 2013, $280,000; and 2014, $350,000. During the entire period ending December 31 of each year, the outstanding stock of the company was composed of 25,000 shares of cumulative, 4% preferred stock, $100 par, and 100,000 shares of common stock, $15 par.

Required:

1.  Calculate 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 on January 1, 2009. Summarize the data in tabular form. If required, round your answers to two decimal places. If the amount is zero, please enter "0"

Year Total
Dividends Preferred Dividends Common Dividends
Total Per Share Total Per Share

2.  Calculate the average annual dividend per share for each class of stock for the six-year period. If required, round your answers to two decimal places.

Average annual dividend for preferred: Average annual dividend for common:

3.  Assuming a market price per share of $290 for the preferred stock and $19 for the common stock, calculate the average annual percentage return on initial shareholders' investment, based on the average annual dividend per share for preferred stock and for common stock.

Round your answers to two decimal places.

Preferred stock:
Common stock

Explanation / Answer

To solve it you first need to compute the amount of dividend needed to satisfy the preferred stock. At $80 par x 2% = $1.60/share. There are 25,000 outstanding x $1.60 = $40,000 which is the annual amount needed to satisfy the preferred. Because this is a cumulative preferred, if there is not enough money in the pot to pay that amount in full, it is counted as a deficit and must be paid out of future dividends available. The par value of the common stock has no influence on the payment of the common's dividend.

...............Pref. Div. ..Pref. Div. Deficit ..Pref. Div./share .. Common Div. ..C.Div./share

Yr 2007: $16,000 .... $24,000 ............. $0.64 .................$0 ..................$0
Yr 2008: $48,000 .... $16,000 ............. $1.92 .................$0 ..................$0
Yr 2009: $56,000 .... $0 ..................... $2.24 .................$9,000 ............$0.09
Yr 2010: $40,000 .... $0 ..................... $1.60 .................$50,000 ..........$0.50
Yr 2011: $40,000 .... $0 ..................... $1.60 .................$75,000 ..........$0.75
Yr 2012: $40,000 .... $0 ..................... $1.60 .................$100,000 ........$1.00

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