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Problem 18-16 Dividend valuation model and wealth maximization (LO18-2] Omni Telecom is trying to decide...

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Problem 18-16 Dividend valuation model and wealth maximization (LO18-2] Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. PO=1 D1 - 9 PO = Price of the stock today D1 = Dividend at the end of the first year D1 = DO ~ (1 + g) DO = Dividend today Ke = Required rate of return g=Constant growth rate in dividends Do is currently $3.10, Ke is 10 percent, and gis 4 percent. Under Plan A, D would be immediately increased to $3.50 and Ke and g will remain unchanged. Under Plan B, D will remain at $3.10 but g will go up to 5 percent and Ke will remain unchanged. a. Compute Po (price of the stock today) under Plan A. Note D1 will be equal to Do (1 + g) or $3.50 (1.04). Ke will equal 10 percent, and g will equal 4 percent. (Round your intermediate calculations and final answer to 2 decimal places.) Stock price for Plan A b. Compute Po (price of the stock today) under Plan B. Note D1 will be equal to Do (1 + g) or $3.10 (1.05). Ke will be equal to 10 percent, and g will be equal to 5 percent. (Round your intermediate calculations and final answer to 2 decimal places.) Stock price for Plan B c. Which plan will produce the higher value? Plan A Plan B

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