17-5B. (Dividends in peifect markets) The management of Montford, Inc., is considering two dividend policies for the years 1997 and 1998, one and two years away. In 1999, the management~

planning to liquidate the finn. One plan would pay a dividend of $2.55 in 1997 and 1998 and a liquidating dividend of$45.60 in 1999. The alternative would be to payout $4.35 in dividends in 1997, $4.70 in dividends in 1998, and a final dividend of $40.62 in 1999. The required rate of return for the common stockholders is 17 percent. Management is concerned about the effect of the two dividend streams on the value of the common stock.

a. Assuming perfect markets, what would be the effect?

b. What factors in the real world might change your conclusion reached in part (a)?