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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. Po= D1
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. Po= D1 Ke - g Po = Price of the stock today D = Dividend at the end of the first year D1 = Do * (1 + g) Do = Dividend today Ke= Required rate of return g=Constant growth rate in dividends Do is currently $2.80, Ke is 12 percent, and g is 5 percent. Under Plan A, Do would be immediately increased to $3.40 and Ke and g will remain unchanged. Under Plan B, Do will remain at $2.80 but g will go up to 6 percent and Ke will remain unchanged. a. Compute Po (price of the stock today) under Plan A. Note D1 will be equal to Do X (1 + g) or $3.40 (1.05). Ke will equal 12 percent, and g will equal 5 percent. (Round your intermediate calculations and final answer to 2 decimal places.) Stock price for Plan A b. Compute Po (price of the stock today) under Plan B. Note D1 will be equal to Do X (1 + g) or $2.80 (1.06). Ke will be equal to 12 percent, and g will be equal to 6 percent. (Round your intermediate calculations and final answer to 2 decimal places.) Stock price for Plan B c. Which plan will produce the higher value? Plan B Plan A
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