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 $3.20, Ke is 11 percent, and g is 6 percent.

Under Plan A, D00 would be immediately increased to $3.60 and Ke and g will remain unchanged.

Under Plan B, D00 will remain at $3.20 but g will go up to 7 percent and Ke will remain unchanged.

1. Compute P00 (price of the stock today) under Plan A. Note D1 will be equal to D0(1+g) or $3.60 (1.06)Note 1 will be equal to 0(1+) $3.60 (1.06) . Ke will equal 11 percent, and g will equal 6 percent.
   1. Stock Price for Plan A=
2. Compute P00 (price of the stock today) under Plan B. Note D1 will be equal to D0(1+g) or $3.20 (1.07)Note 1 will be equal to 01+ $3.20 1.07 . Ke will be equal to 11 percent, and g will be equal to 7 percent.
   1. Stock Price for Plan B
3. Which plan will produce the higher value?

A. Plan A

B. Plan B