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?

Question

Business

Madden Horton

1 September, 16:54

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?

+2

Answers (1)

Know the Answer?

Lorenzo · 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.