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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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Solution Summary

The solution explains the calculation of the price of stock using the dividend discount model.

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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. ...

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