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 approacimate answer but calculate your final answer using the formula and financial calculator methods. Plan Plan B 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 PanA Puan b 2. Which plan will provide the higher present value for the future dividends? O Plan A Plan B

Answer 1

Total Dividend = Sum of all dividends

Plan A = 1.70*3+1.90*2

= $8.90 per share

Plan B = 0.50+2.40+0.30+3+1.60 = $7.80 per share

b-1.Present value under Plan A = 1.70*0.935 + 1.70*0.873 + 1.70*0.816 + 1.90*0.763 + 1.90*0.713

= $7.2652

i.e. $7.27

Plan B = 0.50*0.901 + 2.40*0.812 + 0.30*0.731 + 3*0.659 + 1.60*0.593

= $5.5444

i.e. $5.54 per share

Plan A