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		$	1.60			$	0.40
2			1.60				2.00
3			1.60				0.20
4			2.00				4.00
5			2.00				1.40

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.)

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 15 percent. Compute the present value of future dividends. (Do not round intermediate calculations and round your answers to 2 decimal places.)

Answer 1

Part A:

Total Div = Sum of Dividends over 5 years

Plan A:

= $ 1.60 +$ 1.60 +$ 1.60 + $ 2.00 + $ 2.00

= $ 8.80

Plan B:

= $ 0.40+ $ 2.00 + $ 0.20 + $ 4.00 + $ 1.40

= $ 8.00

PV of Dividend:

Plan A:

Year	Div	PVF @11%	Disc Div
1	$      1.60	0.9009	$      1.44
2	$      1.60	0.8116	$      1.30
3	$      1.60	0.7312	$      1.17
4	$      2.00	0.6587	$      1.32
5	$      2.00	0.5935	$      1.19
PV of Dividends	$      6.41

Plan B:

Year	Div	PVF @15%	Disc Div
1	$      0.40	0.8696	$      0.35
2	$      2.00	0.7561	$      1.51
3	$      0.20	0.6575	$      0.13
4	$      4.00	0.5718	$      2.29
5	$      1.40	0.4972	$      0.70
PV of Dividends	$      4.97