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 $2.60, Ke is 8 percent, and g is 4 percent.

Under Plan A, D0 would be immediately increased to $3.00 and Ke and g will remain unchanged.

Under Plan B, D0 will remain at $2.60 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 $3.00 (1.04). Ke will equal 8 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 $2.60 (1.05). Ke will be equal to 8 percent, and g will be equal to 5 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

Answer 1