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 $ 1.80 $ .50
  2 1.80 2.20
  3 1.80 .20
  4 2.10 4.00
  5 2.10 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.)

Total Dividends
Plan A
Plan B



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 10 percent; the discount rate for Plan B is 14 percent. Compute the present value of future dividends. (Do not round intermediate calculations and round your answers to 2 decimal places.)
  

Present Value of Future Dividends
Plan A
Plan B


b-2. Which plan will provide the higher present value for the future dividends?
  

   Plan A
Plan B

Homework Answers

Answer #1

Total DIv = Sum of Dividends

Plan A: 1.8 + 1.8 +1.8 +2.1+ 2.1

= 11.7

Plan B: 0.5 + 2.2 + 0.20 + 4.00 + 1.40

= 8.30

B1:

B2:

Plan A is selected as PV of dividends is more for Plan A.

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