Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.

P$0=$D$1$Ke$$g

P$0$

$=$ Price of the stock today

D$1$

$=$ Dividend at the end of the first year

D$1=$D$0\backslash$times $(1+$g$)$

D$0$

$=$ Dividend today

Ke

$=$ Required rate of return

g $=$ Constant growth rate in dividends

D$0$

is currently $$2\mathrm{.}60,$ Ke

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

Under Plan A$,$ D$0$

would be immediately increased to $$3\mathrm{.}00$ and Ke

and g will remain unchanged.

Under Plan B$,$ D$0$

will remain at $$2\mathrm{.}60$ but g will go up to $5$ percent and Ke

will remain unchanged.

Compute P$0$

$($price of the stock today$)$ under Plan A$.$ Note D$1$ will be equal to D$0\backslash$times $(1+$g$)$ or $$3\mathrm{.}00(1\mathrm{.}04)$

$.$ Ke

will equal $8$ percent, and g will equal $4$ percent.

Note: Round your intermediate calculations and final answer to $2$ decimal places.

Compute P$0$

$($price of the stock today$)$ under Plan B$.$ Note D$1$ will be equal to D$0\backslash$times $(1+$g$)$ or $$2\mathrm{.}60(1\mathrm{.}05)$

$.$ Ke

will be equal to $8$ percent, and g will be equal to $5$ percent.

Note: Round your intermediate calculations and final answer to $2$ decimal places.

Which plan will produce the higher value?

multiple choice

Plan A

Plan B

Omni Telecom is trying to decide whether to increase its cash dividend immediately or use

the funds to increase its future growth rate.

$P_0=\frac{D_1}{K_e-g}$

$P_0=$ Price of the stock today

$D_1=$ Dividend at the end of the first year

$D_1=D_0(1+g)$

$D_0=$ Dividend today

$K_e=$ Required rate of return

$g=$ Constant growth rate in dividends

$D_0$ is currently $$2\mathrm{.}60,K_e$ is $8$ percent, and $g$ is $4$ percent.

Under Plan A$,D_0$ would be immediately increased to $$3\mathrm{.}00$ and $K_e$ and $g$ will remain

unchanged.

Under Plan B$,$ Do will remain at $$2\mathrm{.}60$ but $g$ will go up to $5$ percent and $K_e$ will remain

unchanged.

a$.$ Compute $P_0($price of the stock today$)$ under Plan A$.$

Note $D_1$ will be equal to $D_0(1+g)$ or $$3\mathrm{.}00(1\mathrm{.}04).K_e$ will equal $8$ percent,

and $g$ will equal $4$ percent.

Note: Round your intermediate calculations and final answer to $2$ decimal places.

Stock price for Plan A

b$.$ Compute $P_0($price of the stock today$)$ under Plan $B.$

Note $D_1$ will be equal to $D_0(1+g)$ or $$2\mathrm{.}60(1\mathrm{.}05).K_e$ will be equal to $8$

percent, and $g$ will be equal to $5$ percent.

Note: Round your intermediate calculations and final answer to $2$ decimal places.

Stock price for Plan B