Question

Dividends on Preferred and Common Stock

Yukon Bike Corp. manufactures mountain bikes and distributes them through retail outlets in Canada, Montana, Idaho, Oregon, and Washington. Yukon Bike Corp. declared the following annual dividends over a six-year period ending December 31 of each year: Year 1, $48,000; Year 2, $60,000; Year 3, $96,000; Year 4, $264,000; Year 5, $336,000; and Year 6, $432,000. During the entire period, the outstanding stock of the company was composed of 30,000 shares of 4% preferred stock, $100 par, and 100,000 shares of common stock, $5 par.

Instructions:

1. Determine the total dividends and the per-share dividends declared on each class of stock for each of the six years. If required, round your answers to the nearest cent. If the amount is zero, please enter "0".

						Preferred Dividends									Common Dividends
Year	Total Dividends					Total						Per Share			Total						Per Share
Year 1		$   48,000		$			$						$			$
Year 2		60,000
Year 3		96,000
Year 4		264,000
Year 5		336,000
Year 6		432,000
							$									$

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

Average annual dividend for preferred:	$ per share
Average annual dividend for common:	$ per share

3. Assuming a market price per share of $196 for the preferred stock and $10 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:	%

Answer 1

		Preferred Dividends		Common Dividends
Year	Total Dividends	Total	Per share	Total	Per share
Year 1	$   48,000	48000	1.6	0	0
Year 2	60,000	60000	2	0	0
Year 3	96,000	96000	3.2	0	0
Year 4	2,64,000	264000	8.8	0	0
Year 5	3,36,000	132000	4.4	2,04,000	2.04
Year 6	4,32,000	120000	4	3,12,000	3.12
		720000		516000

1)
30,000 x 4% x 100 = $120,000 dividends owed to preferred shareholders each year
Year 1= 48,000
Preferred
Total $48,000
48,000 / 30,000 = $1.60 per share, $72,000 dividends is in arrears
Common
0

Year 2=   60,000
Preferred
Total $60,000
60,000 / 30,000 = $2.00 per share. There is now $132,000 dividends in arrears
Common
0

Year-3 = 96,000
Preferred
Total $96,000
96,000 / 30,000 = $3.20 per share. There are now 156000 dividends in arrears
Common
Total $0

Year-4 264,000
Preferred
Total $264,000
264,000 / 30,000 = $8.8 per share

Common
0

Year5 336,000
Preferred
Total $132,000
132,000 / 30,000 = $4.4 per share
Common
Total $204,000
204,000 / 100,000 = $2.04 per share

Year6 432,000
Preferred
Total $120,000
120,000 / 30,000 = $4 per share
Common
Total $312,000
312,000 / 100,000 = $3.12 per share

2)

Since there are no preferred dividends in arrears at the end of the six year period, annual dividend per share for preferred stock is $4.00 per share, the same amount they are owed every year. For common share holders, first add up total dividends paid to them.

204000 + 312000 = 516,000
There were 100,000 shares outstanding each year and there were six years. 6 x 100,000 = 600,000.
516,000 / 600,000 = $0.86 average annual dividend per share for common stock.

3)

Preferred stock = $4 / 196 * 100 = 2.04%

Common stock = .86/10*100 = 8.6%