Accounting

P8-5 Dividends on preferred and common stock

Objs|4, 5

✓ 1. Preferred dividends in 2009: $44,000

Yukon Bike Corp. manufactures mountain bikes and distributes them through retail outlets in Canada, Montana, Idaho, Oregon, and Washington. Yukon Bike Corp. has declared the following annual dividends over a six-year period ending December 31 of each year: 2008, $28,000; 2009, $44,000; 2010, $48,000; 2011, $60,000; 2012, $76,000; and 2013, $140,000. During the entire period, the outstanding stock of the company was composed of 40,000 shares of 2% preferred stock, $65 par, and 50,000 shares of common stock, $1 par.

Instructions

1. Determine the total dividends and the per-share dividends declared on each class of stock for each of the six years. Summarize the data in tabular form, using the following column headings:

Year

Total Dividends

Preferred Dividends

Common Dividends

Total

Per Share

Total

Per Share

2008

$ 28,000

2009

44,000

2010

48,000

2011

60,000

2012

76,000

2013

140,000

2. Calculate the average annual dividend per share for each class of stock for the six-year period.

3. Assuming that the preferred stock was sold at $57.50 and common stock was sold at $5.00 at the beginning of the six-year period, calculate 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.

P8-6 Effect of financing on earnings per share

Obj|8

✓ 1. Plan 3: $1.72

Three different plans for financing a $5,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income.

Instructions

8% bond plan 1- plan 2- plan 3 2,500,000

preferred 4% stock, $100 par plan 1- plan 2 2,500,000 plan 3 1,250,000

common stock, $5 par plan1 5,000,000 plan2 2,500,000 plan3 1,250,000

total, plan1 5,000,000 plan2 5,000,000 plan3 5,000,000

1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,000,000.

2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $300,000.

2. Discuss the advantages and disadvantages of each plan.