Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

please help! Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.

please help!
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future
growth rate.
P0=D1Ke-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 $2.80,Ke is 12 percent, and g is 6 percent.
Under Plan A,D0 would be immediately increased to $3.20 and Ke and g will remain unchanged.
Under Plan B,D0 will remain at $2.80 but g will go up to 7 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 $3.20(1.06).Ke will
equal 12 percent, and g will equal 6 percent.
Note: Round your intermediate calculations and final answer to 2 decimal places.
Stock price for Plan A
b. Compute P0(price of the stock today) under Plan B. Note D1 will be equal to D0(1+g) or $2.80(1.07).Ke will be
equal to 12 percent, and g will be equal to 7 percent.
Note: Round your intermediate calculations and final answer to 2 decimal places.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets And Institutions

Authors: Jeff Madura

8th Edition

0324568215, 978-0324568219

More Books

Students also viewed these Finance questions

Question

Describe several uses for a position description.

Answered: 1 week ago