Risk Reduction

Create an Excel spreadsheet to organize your answers to the following problem.

A company is considering the following two dividend policies for the next five years.

Year	Policy #1	Policy #2
1	$4.00	$2.20
2	$4.00	$4.00
3	$4.00	$3.10
4	$4.00	$5.70
5	$4.00	$5.00

Part 1: How much total dividends per share will the stockholders receive over the five-year period under each policy?

Part 2: If investors see no difference in risk between the two policies, and, therefore, apply a 9% discount rate to both, what is the present value of each dividend stream?

Part 3: Suppose investors see Policy #2 as the riskier of the two. And they, therefore, apply a 9% discount rate to Policy #1 but a 13% discount rate to Policy #2. Under this scenario, what is the present value of each dividend stream?

Part 4: What conclusions can be drawn from this exercise?