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		$	1.80			$	.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

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.