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Dividend Valuation Model of Eastern Telecom

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.

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