Problem 1
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.
Problem 2
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.
Plan 1 Plan 2 Plan 3
8% bonds " " $2,500,000
Preferred 4% stock, $100 par " $2,500,000 1,250,000
Common stock, $5 par $5,000,000 2,500,000 1,250,000
Total $5,000,000 $5,000,000 $5,000,000
Instructions
1. Deterrmine 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.
3. Discuss the advantages and disadvantages of each plan.