In doing a five-year analysis of future dividends, the Dawson Corporation is considering the following two plans. The values represent dividends per share. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Year | Plan A | Plan B | ||||||
1 | $ | 1.60 | $ | 0.50 | ||||
2 | 1.60 | 2.60 | ||||||
3 | 1.60 | 0.30 | ||||||
4 | 1.90 | 3.00 | ||||||
5 | 1.90 | 1.40 | ||||||
a. How much in total dividends per share will be paid under each plan over five years? (Do not round intermediate calculations and round your answers to 2 decimal places.)
b-1. Mr. Bright, the Vice-President of Finance, suggests that stockholders often prefer a stable dividend policy to a highly variable one. He will assume that stockholders apply a lower discount rate to dividends that are stable. The discount rate to be used for Plan A is 11 percent; the discount rate for Plan B is 13 percent. Compute the present value of future dividends. (Do not round intermediate calculations and round your answers to 2 decimal places.)
b-2. Which plan will provide the higher present value for the future dividends?
Plan A
Plan B
a. total dividends under Plan A
total dividends = sum of yearly dividends = $1.60 + $1.60 + $1.60 + $1.90 + $1.90 = $8.60
total dividends under Plan B
total dividends = sum of yearly dividends = $0.50 + $2.60 + $0.30 + $3.00 + $1.40 = $7.80
b-1. Present value of Future dividends
Year | Plan A | Plan B |
1 | $1.60 | $0.50 |
2 | $1.60 | $2.60 |
3 | $1.60 | $0.30 |
4 | $1.90 | $3.00 |
5 | $1.90 | $1.40 |
Discount rate | 11% | 13% |
Present value | $6.29 | $5.29 |
Calculations
b-2 . Plan A will provide the higher present value for the future dividends because its total future dividends is higher than Plan B's total future dividends and its discount rate is lower than Plan B's discount rate.
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