In: Finance
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?