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 s 1.60 1.60 1.60 1.90 Plan B $ 50 2.60 .30 3.00 1.40 1.90 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 placos.) 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 13 percent. Compute the present value of future dividends. (Do not round intermediate calculations and round your answers to 2 decimal places.) b-2. Which plan will provide the higher present value for the future dividends? O Plan A O Plan B

Answer 1

a)

Sum of dividend for Plan A = 1.60 + 1.60 + 1.60 + 1.90 + 1.90

Sum of dividend for Plan A 8.60

Sum of dividend for Plan B = 0.50 + 2.60 + 0.30 + 3.00 + 1.40

Sum of dividend for Plan B = 7.80

b-1)

Present value of dividends Plan A at the discount rate of 11%

Present Value = Future Value * ((1+r)^-n)

1.60* ((1+0.11)^-1) + 1.60 * ((1+0.11)^-2) + 1.60 * ((1+0.11)^-3) + 1.90 * ((1+0.11)^-4) + 1.90 * ((1+0.11)^-5)

1.44 + 1.30 + 1.17 + 1.25 + 1.13

Present value of dividends Plan A = 6.29

Present value of dividends Plan B at the discount rate of 13%

Present Value = Future Value * ((1+r)^-n)

0.50 * ((1+0.13)^-1) + 2.60 * ((1+0.13)^-2) + 0.30 * ((1+0.13)^-3) + 3.00 * ((1+0.13)^-4) + 1.40 * ((1+0.13)^-5)

0.44 + 2.04 + 0.21 + 1.84 + 0.76

Present value of dividends Plan B = 5.29

b-2)

Plan A has a consistent dividend payment and a higher present value for the future dividends

Plan A year 3 1.60 | ((1+0.11)^-1) | ((1+0.11)^-2) | ((1+0.11)^-3) | ((1+0.11)^-4) | ((1+0.11)^-5) 0.7312 1.17 year 1 1.60 year 2 1.60 year 4 1.90 year 5 1.90 8.60 present value formula resent value factor present values 0.9009 0.8116 0.6587 0.5935 1.44 1.30 1.25 1.13 6.29 Plan B year 3 0.30 | ((1+0.13)^-1) | ((1+0.13)^-2) | ((1+0.13)^-3) | ((1+0.13)^-4) | ((1+0.13)^-5) 0.6931 0.21 year 1 0.50 year 2 2.60 year 4 3.00 year 5 1.40 7.80 present value form ula resent value factor present values 0.8850 0.7831 0.6133 0.5428 0.44 2.04 1.84 0.76 5.29