Question

Omni 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 on page 300 and is reproduced below (with a slight addition in definition of terms).

Answer 1

Omni Telecom considers increasing dividends or investing for growth using a dividend valuation model to compare expected shareholder returns. The dividend valuation model helps companies decide whether to increase their cash dividend or invest in future growth.

Step-by-step explanation:

The dividend valuation model helps companies decide whether to increase their cash dividend immediately or use the funds for future growth. It calculates the present value of all expected future dividends and capital gains, using a discount rate. By comparing the present value of dividends to the price per share, the company can determine the value of the stock.

Example: If Omni Telecom expects to pay dividends of $2 million annually for the next 5 years, and the discount rate is 10%, the present value of these dividends would be calculated. If the present value is higher than the current stock price, it may be more beneficial for the company to increase the cash dividend.