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    Dividend Valuation Model of Eastern Telecom

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    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.

    P=d/k-g
    P= Price of the stock today
    D1= Dividend at end of the first year
    D x (1 x g)
    D0= Dividend today
    K= Required rate of return
    G= Constant growth rate in dividends
    D0 is currently $3.00, K is 10% and g is 5%

    Under Plan A D0 would be immediately increase to $3.40 and K and G will reminded unchanged Under Plan B D0 will remain at $3 but g will go up to 6% and K will remain unchanged

    A. Compute P under plan A. (Note D1 will be equal to d0x(1+g) K will equal 10% and G will equal 5%)
    B. Compute P under plan B (Note D1 will be equal to d0x(1+g) K will equal 10% and G will equal 6%)
    C. Which plan has the Higher value.

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    https://brainmass.com/business/accounting-for-corporations/dividend-valuation-model-eastern-telecom-100035

    Solution Preview

    A. Compute P under plan A. (Note D1 will be equal to d0x(1+g) K will equal 10% and G will equal 5%)

    a. ...

    Solution Summary

    The solution explains the use of dividend valuation model to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate

    $2.19