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            P8-5. 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, $28,000; Year 2, $44,000; Year 3, $48,000; Year 4, $60,000; Year 5, $76,000; and Year 6, $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.

1. Determine the total dividends and the per-share dividends declared on each class of stock for each of the six years. Assume that preferred dividends are paid before any common dividends. Summarize the data in tabular form, using the following column headings:

Yukon Bike Corp.

Year

Total

Dividends

Preferred Dividends

Common Dividends

Total

Per Share

Total

Per Share

Year 1

$ 28,000

28000

0.7

0

0

Year 2

44,000

44000

1.1

0

0

Year 3

48,000

48000

1.2

0

0

Year 4

60,000

52000

1.3

8000

0.16

Year 5

76,000

52000

1.3

24000

0.48

Year 6

140,000

52000

1.3

88000

1.76

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

Solution: Total Preferred stock dividends for the six years is equal to $ 276000.

So the average preferred stock dividends will be = 276000/6

= $ 46000

Total common stock dividends for six years is equal to $ 120,000.

So the average common stock dividend will be= 120000/6

= $ 20000

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.

Year

Total

Preferred Dividends

Common Dividends

Dividends

Total

Per Share

Total

Per Share

Year 1

$28,000

28000

0.7

0

0

Year 2

44,000

44000

1.1

0

0

Year 3

48,000

45600

1.14

2400

0.048

Year 4

60,000

45600

1.14

14400

0.288

Year 5

76,000

45600

1.14

30400

0.608

Year 6

140,000

45600

1.14

94400

1.888

Total Dividends

 

254400

 

141600

 

Average Dividends

 

42400

 

23600

 

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