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Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. Po =
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. Po = D1 Ke - 9 Pa = Price of the stock today D1 = Dividend at the end of the first year D1 - Do X (1 + 9) Da = Dividend today Ke = Required rate of return g=Constant growth rate in dividends Do is currently $2.80, ke is 12 percent, and g is 6 percent. Under Plan A, Dg would be immediately increased to $3.20 and Ke and g will remain unchanged. Under Plan B, De will remain at $2.80 but g will go up to 7 percent and Ke will remain unchanged. a. Compute Pe (price of the stock today) under Plan A. Note Du will be equal to Do * (1 + g) or $3.20 (1.06). Ke will equal 12 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 Pe (price of the stock today) under Plan B. Note D, will be equal to Do (1 + g) or $2.80 (1.07). Ke will be equal to 12 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? O Plan A O Plan B
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