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.
Assuming that the preferred stock was sold at $80 and common stock was sold at par at the beginning of the six-year period, calculate the average annual percentage return on initial shareholders’s investment, based on the average annual dividend per share (a) for preferred stock and (b) for common stock.
Would it be: a.3.42% b. 3.87%

To calculate the average annual percentage return on initial shareholders' investment, we need to find the average annual dividend per share for both the preferred stock and the common stock.

(a) Average annual dividend per share for preferred stock:
Total dividends for the six-year period = $21,000 + $50,000 + $15,000 + $80,000 + $90,000 + $140,000 = $396,000
Number of preferred shares outstanding = 10,000
Average annual dividend per share for preferred stock = Total dividends / Number of preferred shares
= $396,000 / 10,000
= $39.60

(b) Average annual dividend per share for common stock:
Total dividends for the six-year period = $21,000 + $50,000 + $15,000 + $80,000 + $90,000 + $140,000 = $396,000
Number of common shares outstanding = 100,000
Average annual dividend per share for common stock = Total dividends / Number of common shares
= $396,000 / 100,000
= $3.96

Now we can calculate the average annual percentage return on initial shareholders' investment for both the preferred stock and the common stock.

(a) For preferred stock:
Market value of preferred stock = $80
Average annual dividend per share for preferred stock = $39.60
Average annual percentage return on initial shareholders' investment for preferred stock = (Average annual dividend per share / Market value of preferred stock) x 100
= ($39.60 / $80) x 100
≈ 49.50%

(b) For common stock:
Market value of common stock = $10 (par value)
Average annual dividend per share for common stock = $3.96
Average annual percentage return on initial shareholders' investment for common stock = (Average annual dividend per share / Market value of common stock) x 100
= ($3.96 / $10) x 100
= 39.60%

So, the correct answers are:
(a) The average annual percentage return on initial shareholders' investment for preferred stock is approximately 49.50%.
(b) The average annual percentage return on initial shareholders' investment for common stock is 39.60%.

Therefore, the answer you have provided, a. 3.42% for the preferred stock and b. 3.87% for the common stock, are not correct.

To calculate the average annual percentage return on the initial shareholders' investment for both the preferred stock and the common stock, we need to follow these steps:

Step 1: Calculate the total initial investment for both the preferred stock and the common stock.

The preferred stock was sold at $80 per share with a par value of $75 per share. Therefore, the initial investment per share of preferred stock is $80.

The common stock was sold at par at the beginning of the six-year period, which means the initial investment per share of common stock is $10.

For the preferred stock: Initial investment = Number of preferred shares * Initial investment per share
Initial investment = 10,000 * $80 = $800,000

For the common stock: Initial investment = Number of common shares * Initial investment per share
Initial investment = 100,000 * $10 = $1,000,000

Step 2: Calculate the total dividends received for the six-year period.

The annual dividends declared for each year are as follows: 2003, $21,000; 2004, $50,000; 2005, $15,000; 2006, $80,000; 2007, $90,000; and 2008, $140,000.

For the preferred stock: Total dividends received = Sum of annual dividends for preferred stock
Total dividends received = $21,000 + $50,000 + $15,000 + $80,000 + $90,000 + $140,000 = $396,000

For the common stock: Total dividends received = Sum of annual dividends for common stock
Total dividends received = $0 (since no dividends were specified for common stock)

Step 3: Calculate the average annual dividend for each type of stock.

For the preferred stock: Average annual dividend per share = Total dividends received / Number of preferred shares
Average annual dividend per share = $396,000 / 10,000 = $39.60

For the common stock: Average annual dividend per share = Total dividends received / Number of common shares
Average annual dividend per share = $0 (since no dividends were specified for common stock)

Step 4: Calculate the average annual percentage return on the initial shareholders' investment.

For the preferred stock: Average annual percentage return = (Average annual dividend per share / Initial investment per share) * 100
Average annual percentage return = ($39.60 / $80) * 100 = 49.5%

For the common stock: Average annual percentage return = (Average annual dividend per share / Initial investment per share) * 100
Average annual percentage return = ($0 / $10) * 100 = 0%

Therefore, the correct answers are:
a) Average annual percentage return on the initial shareholders' investment for preferred stock: 49.5%
b) Average annual percentage return on the initial shareholders' investment for common stock: 0%