Question
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. P0=D1Keg0=1 P00
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.
P0=D1Keg0=1
P00 = Price of the stock today
D11 = Dividend at the end of the first year
D1=D0(1+g)1=0(1+)
D00 = Dividend today
Ke = Required rate of return
g = Constant growth rate in dividends
D00 is currently $2.00, Ke is 10 percent, and g is 4 percent.
Under Plan A, D00 would be immediately increased to $2.50 and Ke and g will remain unchanged.
Under Plan B, D00 will remain at $2.00 but g will go up to 5 percent and Ke will remain unchanged.
- Compute P00 (price of the stock today) under Plan A. Note D1 will be equal to D0(1+g) or $2.50 (1.04)Note 1 will be equal to 0(1+) $2.50 (1.04) . Ke will equal 10 percent, and g will equal 4 percent.
Note: Round your intermediate calculations and final answer to 2 decimal places.
- Compute P00 (price of the stock today) under Plan B. Note D1 will be equal to D0(1+g) or $2.00 (1.05)Note 1 will be equal to 01+ $2.00 1.05 . Ke will be equal to 10 percent, and g will be equal to 5 percent.
Note: Round your intermediate calculations and final answer to 2 decimal places.
- Which plan will produce the higher value?
- multiple choice
Plan B
Plan A
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