Dividends on preferred and common stock


Olympic Theatre Inc. owns and operates movie theaters throughout Texas and California. Olympic Theatre has declared the following annual dividends over a six-year period: 2003, $21,000; 2004, $50,000; 2005, $15,000; 2006, $80,000; 2007, $90,000; and 2008, $140,000. During the entire period, the outstanding stock of the company was composed of 10,000 shares of 4% preferred stock, $75 par, and 100,000 shares of common stock, $10 par.

Round all answers to nearest whole cent.

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, 2002. If there were no dividends in a given year, enter 0.0. If dividends were less than one dollar, enter '0.XX' where XX is the value of the dividend. Give the following:


Per Share - Preferred Per Share - Common
2003 $ $
2004
2005
2006
2007
2008

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You are not going to understand this if we simply give you the answers. We will work with you to understand the question, but you need to attempt it so we can see where you are not understanding. Let me get you started.

The first thing to understand is that Preferred Stock shareholders will receive dividends declared before Common Stock shareholders. Preferred Stock dividends are paid at a fixed rate. You question states that there are 10,000 shares of 4%, $75 par preferred shares. This tells you that there is $750,000 in preferred stock (10,000*75). The dividend rate will be 4% of $750,000, or $30,000. In any year, the Preferred Shareholders will be paid first, up to the amount declared. Dividends in arrears refers to the amount that is owed to preferred shareholders for years where the expected amount ($30,000) could not be paid. Common Stock shareholders will only receive dividends if there is money left over after satisfying the amount owed to Preferred shareholders for the current year and any years in arrears. You can compute the amount per share by dividing the dividend by the number of shares.

Just take this step by step. In year 2003, compute the amount due Preferred. Compare it to the amount declared. The company will only issue the amount declared, but if this amount is greater than the amount due the preferred and there are no arrears, the common share stockholders will share in that amount. Do what you can, and if you need help ask again. Thanks.