Love Theatre Inc. Owns And Operates Movie Theaters Throughou
Love Theatre Inc Owns And Operates Movie Theaters Throughout New Mexi
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: 2007, $16,000; 2008, $48,000; 2009, $65,000; 2010, $90,000; 2011, $115,000; and 2012, $140,000. During the entire period ending December 31 of each year, the outstanding stock of the company was composed of 25,000 shares of cumulative, 2% preferred stock, $80 par, and 100,000 shares of common stock, $4 par.
Instructions: 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, 2007. Summarize the data in tabular form. If required, round your answers to two decimal places. If the amount is zero, please enter "0".
Paper For Above instruction
Introduction
The calculation of dividends distributed to preferred and common shareholders is fundamental in understanding the financial distributions of a corporation. For Love Theatre Inc., the dividend allocations over six years reflect the company's profitability, dividend policy, and the characteristics of its preferred stock, which is cumulative and carries a 2% dividend rate. This paper systematically computes the total dividends and per-share dividends for each class of stock for each given year, considering the cumulative nature of preferred dividends and the total declared dividends.
Methodology
The calculation process begins with understanding the preferred stock's dividend entitlement. Given that the preferred stock is cumulative, any unpaid dividends from previous years accrue and must be paid before common shareholders can receive dividends. Preferred stock bears a 2% dividend rate based on its par value of $80, forming an annual dividend of $1.60 per share ($80 × 2%). Total preferred dividends per year are calculated by multiplying the dividend per share by the number of preferred shares outstanding (25,000).
The actual dividends declared each year are compared against the preferred stock's cumulative priority. If dividends declared are insufficient to cover preferred dividends for that year, preferred stockholders receive the entire declared amount first, and no dividends are paid to common shareholders. If dividends declared exceed preferred dividends for that year, the preferred shareholders are paid fully, and the remaining amount goes to common shareholders.
The calculations leverage the following steps:
1. Determine the preferred dividend requirement per year.
2. Allocate dividends first to preferred stock, considering any dividends in arrears from previous years.
3. Calculate the dividends to common stockholders from the remaining amount after preferred dividends are satisfied.
4. Record per-share dividends for each class by dividing total dividends by the number of shares outstanding.
The results are then compiled into a table for clarity.
Calculations and Results
For each year, calculations are performed as follows:
Year 2007
- Preferred dividend requirement: 25,000 shares × $1.60 = $40,000
- Declared dividends: $16,000 (less than preferred requirement)
- Preferred shareholders receive the entire declared amount: $16,000
- Dividends in arrears: $40,000 - $16,000 = $24,000
- Common shareholders: $0
- Per-share dividend preferred: $16,000 / 25,000 = $0.64
- Per-share dividend common: $0
Year 2008
- Preferred dividend requirement: $40,000
- Declared dividends: $48,000
- Preferred shareholders receive their full $40,000
- Remaining for common: $8,000
- Common shareholders (100,000 shares): $8,000 / 100,000 = $0.08
- Preferred: $40,000 / 25,000 = $1.60
- Common: $0.08
Year 2009
- Preferred backlog from previous year: $24,000
- Required for current year: $40,000
- Total preferred accrued: $24,000 + $40,000 = $64,000
- Declared dividends: $65,000
- Preferred shareholders: $64,000
- Remaining: $1,000
- Common shareholders: $1,000 / 100,000 = $0.01
- Preferred per share: $64,000 / 25,000 = $2.56
- Common per share: $0.01
Year 2010
- Preferred backlog: $1,000 (from previous year’s unpaid preferred dividends)
- Preferred requirement: $40,000
- Total preferred owed: $40,000 + $1,000 = $41,000
- Declared dividends: $90,000
- Preferred shareholders: $41,000
- Remainder for common: $49,000
- Common per share: $49,000 / 100,000 = $0.49
- Preferred per share: $41,000 / 25,000 = $1.64
Year 2011
- Preferred backlog: $0 (preferred fully paid in previous years)
- Preferred requirement: $40,000
- Declared dividends: $115,000
- Preferred shareholders: $40,000
- Remaining: $75,000
- Common shareholders: $75,000 / 100,000 = $0.75
- Preferred per share: $40,000 / 25,000 = $1.60
Year 2012
- Preferred backlog: $0
- Preferred requirement: $40,000
- Declared dividends: $140,000
- Preferred shareholders: $40,000
- Remaining: $100,000
- Common shareholders: $100,000 / 100,000 = $1.00
- Preferred per share: $40,000 / 25,000 = $1.60
The comprehensive tabular summary is as follows:
| Year | Total Dividends Declared | Preferred Dividends | Preferred Dividends per Share | Common Dividends | Common Dividends per Share |
|---|---|---|---|---|---|
| 2007 | $16,000 | $16,000 | $0.64 | $0 | $0 |
| 2008 | $48,000 | $40,000 | $1.60 | $8,000 | $0.08 |
| 2009 | $65,000 | $40,000 | $1.60 | $1,000 | $0.01 |
| 2010 | $90,000 | $40,000 | $1.60 | $49,000 | $0.49 |
| 2011 | $115,000 | $40,000 | $1.60 | $75,000 | $0.75 |
| 2012 | $140,000 | $40,000 | $1.60 | $100,000 | $1.00 |
Conclusion
The calculations demonstrate the importance of cumulative preferred dividends in dividend distributions. In years where dividends are insufficient to cover preferred dividend requirements, preferred shareholders are paid in full, and common shareholders receive nothing. Conversely, when dividends declared exceed preferred requirements, common shareholders benefit from the remaining dividends, which increase annually as shown. This analysis aids investors and management in understanding dividend policies, prioritization, and shareholder value distribution.
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