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 UAWN Plan A $1.70 1.70 1.70 1.90 1.90 Plan B $0.50 2.40 0.30 3.00 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.) 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 7 percent; the discount rate for Plan B is 11 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

a.
Total dividend per share under plan A	1.70+1.70+1.70+1.90+1.90
Total dividend per share under plan A	$8.90
Total dividend per share under plan B	0.50+2.40+0.3+3+1.6
Total dividend per share under plan B	$7.80
b.
Calculation of present value of future dividends under plan A
Year	Dividend	Discount factor @ 7%	Present value
1	$1.70	0.9346	$1.59
2	$1.70	0.8734	$1.48
3	$1.70	0.8163	$1.39
4	$1.90	0.7629	$1.45
5	$1.90	0.7130	$1.35
Present value of dividend of plan A			$7.27
Calculation of present value of future dividends under plan B
Year	Dividend	Discount factor @ 11%	Present value
1	$0.50	0.9009	$0.45
2	$2.40	0.8116	$1.95
3	$0.30	0.7312	$0.22
4	$3.00	0.6587	$1.98
5	$1.60	0.5935	$0.95
Present value of dividend of plan B			$5.54