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} |

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 $2.90,

*K*is 9 percent, and

_{e}*g*is 5 percent.

Under Plan A,

*D*

_{0}would be

*immediately*increased to $3.20 and

*K*and

_{e}*g*will remain unchanged.

Under Plan B,

*D*

_{0}will remain at $2.90 but

*g*will go up to 6 percent and

*K*will remain unchanged.

_{e}**a.**Compute

*P*

_{0}(price of the stock today) under Plan A. Note

*D*

_{1}will be equal to

*D*

_{0}× (1 +

*g*) or $3.20 (1.05).

*K*will equal 9 percent, and

_{e}*g*will equal 5 percent.

**(Round your intermediate calculations and final answer to 2 decimal places.)**

**b.**Compute

*P*

_{0}(price of the stock today) under Plan B. Note

*D*

_{1}will be equal to

*D*

_{0}× (1 +

*g*) or $2.90 (1.06).

*K*will be equal to 9 percent, and

_{e}*g*will be equal to 6 percent.

**(Round your intermediate calculations and final answer to 2 decimal places.)**

**c.**Which plan will produce the higher value?

- Plan A
- Plan B. Get Finance homework help today