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