Eastern Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. It will use the dividend valuation model originally presented in Chapter 10 for purposes of analysis. The model was shown as Formula 10-9 and is reproduced below (with a slight addition in definition of terms).
P0 = Price of the stock today
D1 = Dividend at the end of the first year
D0 × (1 + g)
Ke = Required rate of return
g = Constant growth rate in dividends
D0 is currently $3.00, Ke is 10 percent, and g is 5 percent.
Under Plan A, D0 would be immediately increased to $3.40 and Ke and g will remain unchanged.
Under Plan B, D0 will remain at $3.00 but g will go up to 6 percent and Ke will remain unchanged.
a. Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to
D0 × (1 + g) or $3.40 (1.05). Ke will equal 10 percent and g will equal 5 percent.
b. Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to
D0 × (1 + g) or $3.00 (1.06). Ke will be equal to 10 percent and g will be equal to 6 percent.
c. Which plan will produce the higher value?
Our Amazing Features
-
Plagiarism Free Work
Our experts provide 100 % original and customized work On time Delivery
-
24*7 Customer Support
We provide 24*7 online customer supports via online chat or email
-
Cover All Subject
JQA is one stop solution for all subject’s Assignment. We can provide assignment help for almost all subjects.
-
Best Industry experts
We have 1000+ PHD and Post Graduate experts.
Hire a tutor
Assignment hero
USA
I am an experienced tutor of 7+ years in all math, physics, and Spanish, SAT, and ACT tutoring. I love working with students and seeing them improve on and grasp concepts!
Guru
USA
Need help in Maths and science ? Look no further . contact me so i can help you . i have been a academic tutor for 10 years . Hire me for help in assignments.
Vikas
USA
After 13 years of working with students across the country, we have the experience and knowledge to provide the best possible academic support for your academics.
Rgaurav
India
I have experience teaching AP Calculus AB and BC, Algebra I, Algebra II, Trigonometry, SAT Math Preparation, and Geometry. I have tutored students ranging from 8th grade to college students.
