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
|
.50
|
|
2
|
1.60
|
2.60
|
|
3
|
1.60
|
.30
|
|
4
|
1.90
|
3.00
|
|
5
|
1.90
|
1.40
|
a. How much in total dividends per share will be paid under each plan over five years?
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.
b 2. Which plan will provide the higher present value for the future dividends?