Question

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 $ 1.20 $ 0.20 2 1.20 1.40 3 1.20 0.20 4 1.50 4.10 5 1.50 1.60 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?

Answer 1

a)

Value of total Dividend of plan A = 1.2+1.2+1.2+1.5+1.5

= $6.6

Value of total Dividend of plan B = 0.2+1.4+0.2+4.1+1.6

= $ 7.5

b-1)

Present Value of dividend of Plan A

Present Value of dividend of Plan B

b-2) Plan A would provide higher present value than plan B