Question

Knox Inc. is deciding between the two dividend payment plans below: Year Plan A Plan B 1$3.00$0.50 2$3.05$1.75 3$3.10$3.25 4$3.15$6.80 Stockholders are expected to discount Plan A by 15% and Plan B by 10%. Based upon the present value of the future dividends, which plan will the stockholders prefer?

Answer 1

Plan B will be preferred

Explanation:

year     Plan A           Discount (15%) Present value

1        $3                   0.8695           $2.3085

2     $3.05                   0.7561           $2.306105

3      $3.10                      0.6575     $2.03825

4    $3.15                     0.5718           $1.80117

 total                                         $8.754025

Year Plan B Discount (10%) Present value

1        $0.5                0.9090         0.4545

2        $1.75      0.8264          1.4462

3       $3.25        0.7513       2.4417

4       $6.80          0.6230      4.644

         total                                  $8.9870

Thus, from the above calculation, it is clear that investment in plan B will be more fruitful as it will yield more amount of money as has been calculated by present value method.