18-8 In doing a five-year analysis of future dividends, Newell Labs, Inc, is considering the following two plans. The values represent dividends per share Year Plan a Plan b 1 $2.50 2 2. 3.30 2.50 35 2.65 2.80 2.65 a. How much in total dividends per share will be paid under each plan over the b. Ms. Carter, the vice president of finance, suggests that stockholders often prefer a stable dividend policy to a highly variable one. She will assume that stockholders apply a lower discount rate to dividends that are stable The discount rate to be used for Plan a is 10 percent; the discount rate for Plan B is 12 percent. Which plan will provide the higher present value for the future dividends? (Round to two places to the right of the decima Solution: Newell labs Inc a. Plan a($250+255+250+265+265)=$1285 PanB($80+3.30+35+280+660)=$1385 b. plan a Dividend Per share PⅤIF(10%) PⅤ $2.50 909 $227 2.55 826 2.11 2.50 188 2.65 683 1.8 2.65 621 Present Value of future dividends $9.72 S-635 Copyright o 2005 by The McGraw-Hill Companies, IncCopyright © 2005 by The McGraw-Hill Companies, Inc. S-635 18-8. In doing a five-year analysis of future dividends, Newell Labs, Inc., is considering the following two plans. The values represent dividends per share. Year Plan A Plan B 1.......... $2.50 $ .80 2.......... 2.55 3.30 3.......... 2.50 .35 4.......... 2.65 2.80 5.......... 2.65 6.60 a. How much in total dividends per share will be paid under each plan over the five years? b. Ms. Carter, the vice president of finance, suggests that stockholders often prefer a stable dividend policy to a highly variable one. She will assume that stockholders apply a lower discount rate to dividends that are stable. The discount rate to be used for Plan A is 10 percent; the discount rate for Plan B is 12 percent. Which plan will provide the higher present value for the future dividends? (Round to two places to the right of the decimal point.) Solution: Newell Labs, Inc. a. Plan A ($2.50 + 2.55 + 2.50 + 2.65 + 2.65) = $12.85 Plan B ($.80 + 3.30 + .35 + 2.80 + 6.60) = $13.85 b. Plan A Dividend Per Share x PVIF (10%) PV 1 $2.50 .909 $2.27 2 2.55 .826 2.11 3 2.50 .751 1.88 4 2.65 .683 1.81 5 2.65 .621 1.65 Present Value of future dividends $9.72