Stock Valuation - Dividend Policy
Not what you're looking for?
Dividend valuation model and wealth maximization Managial Finance II 476 text problem
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 =
P0 = Price of the stock today
D1 = Dividend at the end of the first year
D0 = (1 x g)
D0 = Dividend today
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 x (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
c. Which plan will produce the higher value?
be equal to 6 percent.
c. Which plan will produce the higher value?
Purchase this Solution
Solution Summary
The solution provides a detailed solution to the dividend discount problem. Solution is provided in pdf format.
Purchase this Solution
Free BrainMass Quizzes
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Learning Lean
This quiz will help you understand the basic concepts of Lean.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Production and cost theory
Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.