Question: Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. P=KegD1 P0=
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. P=KegD1 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 is 6 percent. Under Plan A,D0 would be immediately increased to $3.60 and Ke and g will remain unchanged. Under Plan B, D0 will remain at $3.20 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 $3.60(1.06).Ke will equal 11 percent, and g will equal 6 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 $3.20(1.07).Ke will be equal to 11 percent, and g will be equal to 7 percent. (Round your intermediate calculations and final answer to 2 decimal places.)
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