A company is considering the following two dividend policies for the next five years.YearPolicy #1Policy #24.006.9024.002.404.005.0044.001.704.004.00Required:A. What is the total of the dividends per share that the stockholders will receive over thefull five year period?B. If investors see no difference in the risk between the two policies, and therefore apply a9.4% discount rate to both policies, what is the present value of each dividend stream?C. Suppose investors see Policy #2 as the riskier of the two, and they therefore apply a9.4% discount rate to Policy #1 and a 12% discount rate to Policy #2. Under this scenario,what is the present value of each dividend stream?D. What conclusions can be drawn from this exercise?APolicy #1Policy #2Year1.234Total over five yearsBPolicy #19.40%YearCash FlowPV FactorPresent valuePresent valuePolicy #29.40%Cash FlowPV FactorPresent valueYear1.345Present valuePolicy #19.40%YearCash FlowPV FactorPresent value1.345Present valuePolicy #212.00%YearCash FlowPV FactorPresent value1.345Present valueD

Answered: A company is considering the following…

A company is considering the following two dividend policies for the next five years. Year Policy #1 Policy #2 1 4.00 6.90 4.00 2.40 3 4.00 5.00 4 4.00 1.70 5 4.00 4.00 Required: 2.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 11P

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Question

100%

A company is considering the following two dividend policies for the next five years.
Year
Policy #1
Policy #2
4.00
6.90
2
4.00
2.40
4.00
5.00
4
4.00
1.70
4.00
4.00
Required:
A. What is the total of the dividends per share that the stockholders will receive over the
full five year period?
B. If investors see no difference in the risk between the two policies, and therefore apply a
9.4% discount rate to both policies, what is the present value of each dividend stream?
C. Suppose investors see Policy #2 as the riskier of the two, and they therefore apply a
9.4% discount rate to Policy #1 and a 12% discount rate to Policy #2. Under this scenario,
what is the present value of each dividend stream?
D. What conclusions can be drawn from this exercise?
A
Policy #1
Policy #2
Year
1.
2
3
4
Total over five years
B
Policy #1
9.40%
Year
Cash Flow
PV Factor
Present value
Present value
Policy #2
9.40%
Cash Flow
PV Factor
Present value
Year
1.
3
4
5
Present value
Policy #1
9.40%
Year
Cash Flow
PV Factor
Present value
1.
3
4
5
Present value
Policy #2
12.00%
Year
Cash Flow
PV Factor
Present value
1.
3
4
5
Present value
D

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A) Calculation of Total Dividend:

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B: Calculation of Present Value of Dividend:

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C. Calculation of PV of Dividend in case of 9.4% interest rate for policy 1 and 12% for Policy 2:

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