Posted: February 2nd, 2024

Future Growth Rate Assignment

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
K_e = Required rate of return
g = Constant growth rate in dividends

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D₀ is currently $2.90, K_e is 9 percent, and g is 5 percent.
Under Plan A, D₀ would be immediately increased to $3.20 and K_e and g will remain unchanged.
Under Plan B, D₀ will remain at $2.90 but g will go up to 6 percent and K_e will remain unchanged.

a. Compute P₀ (price of the stock today) under Plan A. Note D₁ will be equal to D₀ × (1 + g) or $3.20 (1.05). K_e will equal 9 percent, and g will equal 5 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 $2.90 (1.06). K_e will be equal to 9 percent, and 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?

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