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=D1Keg P0
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.
P0=D1Keg
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 $2.40, Ke is 13 percent, and g is 5 percent.
Under Plan A, D0 would be immediately increased to $3.00 and Ke and g will remain unchanged.
Under Plan B, D0 will remain at $2.40 but g will go up to 6 percent and Ke will remain unchanged.
1- 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 13 percent, and g will equal 5 percent.
Note: Round your intermediate calculations and final answer to 2 decimal places.
2- Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0(1+g) or $2.40 (1.06) . Ke will be equal to 13 percent, and g will be equal to 6 percent.
Note: Round your intermediate calculations and final answer to 2 decimal places.
3- Which plan will produce the higher value?
multiple choice
Plan B
Plan A
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