Omni Telecom is trying to decide whether to increase its cash dividend immediate

Question

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

D1

D1 = Dividend at the end of the first year

D0 = Dividend today

Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to D0 × (1 + g) or $3.30 (1.05). Ke will equal 8 percent, and g will equal 5 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0 × (1 + g) or $2.80 (1.06). Ke will be equal to 8 percent, and g will be equal to 6 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

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

Explanation / Answer

Price under Plan A = D0(1+G)/Ke-G

= 3.30(1.05)/0.08-0.05

= 3.465/0.03 i.e 115.50

Price under Plan B = D0(1+G)/Ke-G

= 2.80(1.06)/0.08-0.06

= 2.968/0.02 i.e 148.40

Plan B will produce higher value

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