In doing a five-year analysis of future dividends, the Dawson Corporation is con

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.

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:

Plan B:

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 12 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.)

Plan A:

Plan B:

  

  Year Plan A Plan B   1 $ 1.80 $ .30   2 1.80 2.00   3 1.80 .50   4 2.20 6.00   5 2.20 1.50
Appendlix B Present value of 1, PW, Period 0.583 4 5 678s g=2 5 g Percent 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.97 0.909 0.901 0.893 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 | .842 0.826 0.812 | 0.797 0.971 0.942 | 1915 0.889 0.864 0.840 0.816 | 0.794 0.72 | 0.751 0.731 0.712 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.706 10.683 0.659 0.636 0.951 | 0.906 | 0.863 0.822 | | 0.764 | 0.747 0.713 0.681 3.650 | 0.621 0.593 0.567 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.933 | 0.871 | 0.813 | 0.76 | 0.711 0.665 | 0.623 0.547 0.513 | 0.482 10.452 0.923 0.853 0.789 0.731 | 0.677 0.627 0.582 0.540 0.502 0.467 0.434 10.404 0.914 0.837 0.766 0.703 | | 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.905 | 0.820 0.744 0.676 0.614 0.58 0.505 0.463 0.422 0.386 0.352 0.322 0.896 | 0.804 0.722 0.650 0.585 0.27 0.475 0.429 | 0.388 | 0.350 0.317 0.287 0.887 | 0.788 0.701 0.625 0.557 | 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.879 0.73 0.61 0.601 | 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.870 0.758 0.661 0.577 | 0.505 10.442 0.388 0.340 0.299 0.263 0.232 0205 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.853 0.728 0.623 0.534 0.458 | 0.394 | 0.339 | 0.292 0.252 | 0.218 0.18 0.163 0.844 0.714 10.605 0.513 | 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.836 | | 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 | 0.153 0.130 0.828 | 0.686 0.570 0.475 0.396 0.331 1277 0.232 0.194 0.164 0.138 0.116 0.820 | 0.673 | 0.554 0.456 0.377 0.312 0258 0.215 | 0.178 0.149 0.124 | 0.104 0.780 10.610 0.476 0.375 | | 0.295 0.233 0.184 0.1466 0.116 0.092 0.074 0.059 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.672 0.453 0.307 0208 0.142 | 0.097 0.067 0.046 .032 0.022 0.015 0.011 0.608 0.372 0.226 0.087 | 0.054 | 0.034 0.021| 0.013 | 0.009 0.005 | 0.003 98%898 . 141 Appendlx B (concludel) Period | 0.06 34567890 m3 +5 bmp as 98 Percent 13% 14% 15% 16% 17% 18% 19% 20% 25% 30% 35% 40% 50% 0.885 0.877 0.870 0.862 0.855 0.847 0.240 0.833 0.800 0.769 0.741 0.714 | 0.67 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.640 0.592 0.549 1.510 | 0.444 0.693 0.675 0.658 0.641 0.624 | 0.609 0.593 0.579 0.512 0.455 0.406 0.364 0.296 0.613 | | 0.592 0.572 | 0.552 | | 0.534 0.515 0.499 | 0.482 | 0.410 0.350 0.301 0.260 0.198 0.543 0.519 0.497 0.476 0.456 | | 0.437 | 0.419 0.402 0.323 0.269 0.223 0.186 | 0.132 0.480 0.456 | | 0.432 0.410 | 0.390 0.370 0.352 0.335 | 0.262 | | 0207 | 0.165 | 0.133 0.088 0.425 0.400 0.376 | 0.354 0.333 0.314| 0.296 0.279 0.210 | 0.159 0.122 | 0.095 0.059 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0233 0.168 0.123 | 0.091 0.039 0.333 0.308 | 0.284 | | 0.263 | 0.243 0.225 0.209 | 0.1984 0.134 | 0.094 0.067 | .048 | 0.026 0.295 10.270 | | 0.247 | 0.227 0.208 | 0.191 0.176 .162 0.107 | 0.073 | 0.050 0.035 0.017 0.261 0.237 0.215 0.195 0.178 | | 0.162 | 0.148 | 0.135 .056 | 0.056 .037 0.025 0.012 0.231 | 0.208 | 0.1871 10.168 | 0.152 0.137 | 0.124 0.112 0.069 0.043 0.027 0.018 | 0.008 0.204 0.182 | 0.163 0.145 | 0.130 0.116 | | 0.104 | 0.093 0.055 0.033 | 0.020 | | 0.013 0.005 0.181 0.160| | 0.141| 0.125 | 0.111 0.099 0.088 | | 0.078 0.044 | | 0.025 | 0.015 0.009 | 0.003 0.160 0.140 | 0.123 .108 0.095 0.084 0.074 0.085 0.035 | 0.020 | 0.011 .JC6 0.002 0.141 | 0.123 0.107 0.093 | | 0.081 | | 0.071 0.062 | 0.054 0.028 0.015 0.008 0.005 | 0.002 0.125 10.108 0.093 | 0.080 0.069 0.060 0.052 10.045 | 0.023 0.012 0.006 0.003 0.001 0.111 0.095 0.081 0.069 0.059 | 0.051 0.044 | 0.036 | .01g 0.009 0.005 0.002 0.001 0.098 | 0.083 | | 0.070 0.060 | 0.051 0.043 0.037 0.031 0.014| 0.007 0.003 0.002 0.087 0.073 0.061 0.051 0.043 | 0.87 | 0.031 0.026 0.012 | 0.005| 0.002 | 0.001 0.047 0.038 0.030 | 0.024 | | 0.020 0.016 0.013 0.010 0.004 0.001 0.001 0.026 0.020 0.015 0.012 0.009 | 0.007 0.005 | .005 .004 0.001 0 0.008 | 0.005 0.004 0.003 0.002 | 0.001 0.001 | 0.001 0 0.002| | 0.001 0.001 0.001 0 oooo ooo

Explanation / Answer

a)Plan A:Total dividend per share : 1.8+1.8+1.8+2.2+2.2=$ 9.8 per share

Plan B :Total dividend per share : .30+2+.5+6+1.5 = $ 10.30 per share

b)present value of future dividend

Plan A : [PVF 12%,1*d1]+[PVF 12%,2*D2]+.....+[PVF12%,5*D5]

    = [.893*1.8]+[.797*1.8]+[.712*1.8]+[.636*2.2]+[.567*2.2]

    = 1.6074+ 1.4346+ 1.2816+ 1.3992+ 1.2474

   = $ 6.97

PLan: [PVF 15%,1*d1]+[PVF 15%,2*D2]+.....+[PVF15%,5*D5]

= [.870*.3]+[.756*2]+[.658*.5]+[.572*6]+[.497*1.5]

   = .261+ 1.512+ .329+ 3.432+ .7455

     = $ 6.28

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