Question
20) Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. P
20)
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.
P0 | = | D1 |
Ke g |
P0 = Price of the stock today |
D1 = Dividend at the end of the first year |
D1 = D0 (1 + g) |
D0 = Dividend today |
Ke = Required rate of return |
g = Constant growth rate in dividends |
D0 is currently $2.90, Ke is 9 percent, and g is 6 percent. |
Under Plan A, D0 would be immediately increased to $3.30 and Ke and g will remain unchanged. |
Under Plan B, D0 will remain at $2.90 but g will go up to 7 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 $3.30 (1.06). Ke will equal 9 percent, and g will equal 6 percent. (Round your intermediate calculations and final answer to 2 decimal places.) |
Stock price for Plan A | $ |
b. | Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0 (1 + g) or $2.90 (1.07). Ke will be equal to 9 percent, and g will be equal to 7 percent. (Round your intermediate calculations and final answer to 2 decimal places.) |
Stock price for Plan B | $ |
c. | Which plan will produce the higher value? | ||
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