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 6 percent.
Under Plan A, D0 would be
immediately increased to $3.30 and Ke
and g will remain unchanged.
Under Plan B, D0 will remain at $2.90 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 $3.30 (1.06).
Ke will equal 9 percent, and g will
equal 6 percent. (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 $2.90 (1.07).
Ke will be equal to 9 percent, and g
will be equal to 7 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 A | |
| Plan B |
a.
D1 = 3.30*(1+0.06) = 3.498
P0 = D1/(Ke-g) = 3.498/(0.09-0.06) = $116.60
b.
D1 = 2.90*(1+0.07) = 3.103
P0 = 3.103/(0.09-0.07) = $155.15
c.
Plan B has higher value.
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the...
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