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    Coefficient of Variation, Dividend Policy

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    1. Al Bundy is evaluating a new advertising program that could increase shoe sales. Possible outcomes and probabilities of the outcomes are shown below. Compute the coefficient of variation.

    *Possible Outcomes *Additional Sales in Units *Probabilities

    Ineffective campaign 40 .20

    Normal response 60 .50

    Extremely effective 140 .30

    2. 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.)

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    Solution Preview

    Please see attached file.

    1. Al Bundy is evaluating a new advertising program that could increase shoe sales. Possible outcomes and probabilities of the outcomes are shown below. Compute the coefficient of variation.

    *Possible Outcomes *Additional Sales in Units *Probabilities

    Ineffective campaign 40 .20

    Normal response 60 .50

    Extremely effective 140 .30

    For calculating the coefficient of variation we need to find expected (average) value and standard deviation
    Coefficient of variation = Standard deviation / Average

    Possible Outcomes Additional sales (units) Probability Cash inflow x Probability Difference from mean, i.e.80 Difference 2 Prob x Difference 2
    Ineffective ...

    Solution Summary

    Answers 2 questions:
    1) Calculation of Coefficient of Variation for a new advertising program
    2) Dividends: total dividends per share paid under each of 2 plans; present value for the future dividends.

    $2.19