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

K_eg

P₀= Price of the stock today

D₁= Dividend at the end of the first year

D₁=D₀ (1 +g)

D₀= Dividend today

K_e= Required rate of return

g= Constant growth rate in dividends

D₀is currently $2.00,K_eis 8 percent, andgis 4 percent.

Under Plan A,D₀would beimmediatelyincreased to $2.50 andK_eandgwill remain unchanged.

Under Plan B,D₀will remain at $2.00 butgwill go up to 5 percent andK_ewill remain unchanged.

a.ComputeP₀(price of the stock today) under Plan A. NoteD₁will be equal toD₀ (1 +g)or $2.50 (1.04).K_ewill equal 8 percent, andgwill equal 4 percent.(Round your intermediate calculations and final answer to 2 decimal places.)

b.ComputeP₀(price of the stock today) under Plan B. NoteD₁will be equal toD₀ (1 +g)or $2.00 (1.05).K_ewill be equal to 8 percent, andgwill be equal to 5 percent.(Round your intermediate calculations and final answer to 2 decimal places.)

c.Which plan will produce the higher value?

• Plan A
• Plan B