A company is considering the following two dividend policies for the next five years.
Year 1 Policy #1 $4.00 Policy #2 $6.00
Year 2 Policy #1 $4.00 Policy #2 $2.70
Year 3 Policy #1 $4.00 Policy #2 $5.00
Year 4 Policy #1 $4.00 Policy #2 $3.10
Year 5 Policy #1 $4.00 Policy #2 $3.20
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 9.4% 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 9.4% discount rate to Policy #1 but a 14% 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?