A company is considering the following two dividend policies for the next five years. Year Policy...

A company is considering the following two dividend policies for the next five years.

Year	Policy #1	Policy #2
1	$4.00	$6.00
2	$4.00	$2.70
3	$4.00	$5.00
4	$4.00	$3.10
5	$4.00	$3.20

Create an Excel spreadsheet to organize your answers to the following problem, and submit your Excel file as an attachment

Part 1: How much total dividends per share will the stockholders receive over the five year period under each policy?

Part 2: If investors see no difference in risk between the two policies, and therefore apply a 9.4% discount rate to both, what is the present value of each dividend stream?

Part 3: Suppose investors see Policy #2 as the riskier of the two. And they therefore apply a 9.4% discount rate to Policy #1 but a 14% discount rate to Policy #2. Under this scenario, what is the present value of each dividend stream?

Part 4: What conclusions can be drawn from this exercise?

Solutions

Expert Solution

jeff jeffy answered 1 year ago

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