Reference no: EM131688132

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

K_e - g 

P₀ = Price of the stock today

D₁ = Dividend at the end of the first year

D₁ = D₀ × (1 + g)

D₀ = Dividend today

K_e = Required rate of return

g = Constant growth rate in dividends

D₀ is currently $2.50, K_e is 10 percent, and g is 4 percent.

Under Plan A, D₀ would be immediately increased to $2.70 and K_e and g will remain unchanged.

Under Plan B, D₀ will remain at $2.50 but g will go up to 5 percent and K_e will remain unchanged.

a. Compute P₀ (price of the stock today) under Plan A. Note D₁ will be equal to D₀ × (1 + g) or $2.70 (1.04). K_e 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 $2.50 (1.05). K_e 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 A

Plan B