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

Ke g

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 $2.00, Ke is 10 percent, and g is 4 percent. Under Plan A, D0 would be immediately increased to $2.50 and Ke and g will remain unchanged. Under Plan B, D0 will remain at $2.00 but g will go up to 5 percent and Ke will remain unchanged.

a. Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to D0 (1 + g) or $2.50 (1.04). Ke will equal 10 percent, and g will equal 4 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

b. Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0 (1 + g) or $2.00 (1.05). Ke will be equal to 10 percent, and g will 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 B Plan A