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				Plan B
1		$	1.50			$	0.40
2			1.50				2.50
3			1.50				0.30
4			1.80				4.00
5			1.80				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.)

Plan A total dividends

Plan B dividends

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 10 percent; the discount rate for Plan B is 14 percent. Compute the present value of future dividends. (Do not round intermediate calculations and round your answers to 2 decimal places.)

Plan A Present value of future dividends

Plan B Present value of future dividends

b-2. Which plan will provide the higher present value for the future dividends?

• Plan A

• Plan B

Answer 1

a.
Total dividend per share under plan A	1.50+1.50+1.50+1.80+1.80
Total dividend per share under plan A	$8.10
Total dividend per share under plan B	0.40+2.50+0.3+4+1.6
Total dividend per share under plan B	$8.80
b.
Calculation of present value of future dividends under plan A
Year	Dividend	Discount factor @ 10%		Present value
1	$1.50	0.9091	1/(1.1^1)	$1.36
2	$1.50	0.8264	1/(1.1^2)	$1.24
3	$1.50	0.7513	1/(1.1^3)	$1.13
4	$1.80	0.6830	1/(1.1^4)	$1.23
5	$1.80	0.6209	1/(1.1^5)	$1.12
Present value of dividend of plan A				$6.08
Calculation of present value of future dividends under plan B
Year	Dividend	Discount factor @ 14%		Present value
1	$0.40	0.8772	1/(1.14^1)	$0.35
2	$2.50	0.7695	1/(1.14^2)	$1.92
3	$0.30	0.6750	1/(1.14^3)	$0.20
4	$4.00	0.5921	1/(1.14^4)	$2.37
5	$1.60	0.5194	1/(1.14^5)	$0.83
Present value of dividend of plan B				$5.68
Plan A would provide higher present value than plan B