Question

# In doing a five-year analysis of future dividends, the Dawson Corporation is considering the following two...

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 \$ 1.40 \$ 0.60 2 1.40 2.10 3 1.40 0.50 4 1.70 4.00 5 1.70 1.50

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 9 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

Question A

Total dividends = sum of dividenda over all years.

Plan A= 1.4+1.4+1.4+1.7+1.7 =7.60

Plan B= 0.6+2.1+0.5+4+1.5= 8.70

QUESTION B-1

Present value = Summation(Cashflow/(1+disc rate)^Year)

Plan A:

=1.4/1.09 + 1.4/1.09^2 + 1.4/1.09^3 + 1.7/1.09^4 + 1.7/1.09^5

PV for plan A = 5.85

Plan B

PV= 0.6/1.13^1 + 2.1/1.13^2 + 0.5/1.13^3 + 4/1.13^4 + 1.5/1.13^4

PV for plan B= 5.79

Question B2

Plan A is having the high pv for dividends occuring in future. We can see the application of discount rate which reduces the pv value . So we should not have high discount rates or we can say it as high cost of capital.

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