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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. P 0

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\times (1+g)
D0
= Dividend today
Ke
= Required rate of return
g = Constant growth rate in dividends
D0
is currently $2.80, Ke
is 12 percent, and g is 5 percent.
Under Plan A, D0
would be immediately increased to $3.40 and Ke
and g will remain unchanged.
Under Plan B, D0
will remain at $2.80 but g will go up to 6 percent and Ke
will remain unchanged.
Compute P0
(price of the stock today) under Plan A. Note D1 will be equal to D0\times (1+g) or $3.40(1.05)
. Ke
will equal 12 percent, and g will equal 5 percent.
Note: Round your intermediate calculations and final answer to 2 decimal places.
Compute P0
(price of the stock today) under Plan B. Note D1 will be equal to D0\times (1+g) or $2.80(1.06)
. Ke
will be equal to 12 percent, and g will be equal to 6 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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