Question

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 $2.90, Ke is 9 percent, and g is 5 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 $2.90 but g will go up to 6 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 (1.05). Ke will equal 9 percent, and g will equal 5 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 $2.90 (1.06). Ke will be equal to 9 percent, and g will be equal to 6 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

c. Which plan will produce the higher value? Plan A Plan B

Answer #1

A)P0 = 3.2(1+.05)/( .09 -.05)

= 3.2 *1.05 /.04

= $ 3.36/.04

= $ 84 per share

B)P0 = 2.9(1+.06)/(.09-.06)

= 2.9 *1.06 / .03

= $ 102.47 per share

C)Plan B yields higher value.

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 $2.90, Ke
is 9 percent, and...

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

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 $2.80, Ke
is 12 percent, and g...

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 $2.60, Ke is 8 percent, and g...

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 $3.10, Ke
is 10 percent, and g...

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 $2.40, Ke
is 13 percent, and g...

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...

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...

Compute the required values under the following circumstances:
(Do not round intermediate calculations. Round the final
answers to 2 decimal places.)
a. D1 = $4.60;
P0 = $60; g = 6%; F =
$4.00.
Ke
%
Kn
%
b. D1 = $0.25;
P0 = $20; g = 10%; F =
$1.50.
Ke
%
Kn
%
c. E1 (earnings at the end
of period one) = $6; payout ratio equals 30 percent;
P0 = $25; g = 4.5%; F =...

Compute
Ke and Kn
under the following circumstances:
a.
D1 = $5.00, P0 = $70,
g = 8%, F = $7.00. (Round your
intermediate and final answers to 2 decimal places.)
Ke:
Kn:
b.
D1 = $.22, P0 = $28,
g = 7%, F = $2.50. (Round your
intermediate and final answers to 2 decimal places.)
?Ke:
Kn:
c. E1 (earnings at the end of
period one) = $7, payout ratio equals 40 percent,
P0 = $30, g = 6.0%,...

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