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16. (LO18-2) Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.
16. (LO18-2) Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. It will use the dividend valuation model originally presented in Chapter 10 for purposes of analysis. The model was shown as Formula 109 and is reproduced here (with a slight addition in definition of terms): P0=KegD1 P0= Price of the stock today D1= Dividend at the end of the first year D0(I+s) D0 - Dividend today Ke Required rate of return s - Constant growth rate in dividends D0 is currently $2.50,Ke is 10 percent, and g is 5 percent. Under Plan A, D0 would be immedlately inereased to $3.00 and Ke and s will remain unchanged. Under Plan B, D0 will remain at $2,50, but g will go up to 6 percent and Ke will remain unchanged. a. Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to D0(1+g) or $3.00(1.05),Ke will equal 10 percent, and g will equal S percent. b. Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0(1+g) or $2.50(1.06).Ke will be equal to 10 percent, and s will be equal to 6 percent. c. Which plan will produce the higher value
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