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 $1.70 1.70 1.70 1.90 1.90 Plan B $0.60 2.50 0.30 5.00 1.30 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 11 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

Answer 1

Calculate the present value of dividend as follows:

А B C D 111 PLANA PLAN B 112 Year AMOUNT PV Dividend AMOUNT PV Dividend 113 1.7 1.531531532 0.6 0.526315789 114 1.7 1.379758137 2.5 1.923668821 115 3 1.7 1.243025348 0.3 0.202491455 116 4 1.9 1.251588851 5 2.960401387 117 5 1.9 1.127557523 1.3 0.675179264 118 al Total dividend $8.90 $9.70 119 bi Present value $6.53 $6.29 120 b2 PLAN A

Formulas:

Ε А в C 111 PLAN A 112 Year AMOUNT PV Dividend AMOUNT 113 1 1.7 =B113/(1+11%)^A113 0.6 114 2 1.7 =B114/(1+11%)^A114 2.5 115 3 1.7 =B115/(1+11%)^A1150.3 116 4 1.9 =B116/(1+11%)^A116 5 117 5 1.9 =B117/(1+11%)^A117 1.3 118 al Total dividend =SUM(B113:B117) 119 b1 Present value =SUM(C113:C117) 120 b2 PLAN A PLAN B PV Dividend =D113/(1+14%)^A113 =D114/(1+14%)^A114 =D115/(1+14%)^A115 =D116/(1+14%)^A116 =D117/(1+14%)^A117 =SUM(D113:D117) =SUM(E113:E117) 1214