Question

please complete all parts to the question

8. Nonconstant growth stock As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 4.00% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Value Dividends one year from now (D) Horizon value (P) Intrinsic value of Portman's stock

Answer 1

1-a). D1 = D0 * (1 + g1) = $2.40 * (1 + 0.20) = $2.88

1-b). According to the CAPM,

Required Return = rRF + [Beta * Market Risk Premium]

= 5% + [1.30 * 6%] = 5% + 7.8% = 12.8%

P1 = D2 / (r - g) = [D1 * (1 + gC)] / [r - gC]

= [$2.88 * (1 + 0.04)] / [0.128 - 0.04] = $2.9952 / 0.088 = $34.04

1-c). P0 = [D1 + P1] / [1 + r]

= [$2.88 + $34.04] / [1 + 0.128] = $36.92 / 1.128 = $32.73

2). Expected Dividend Yield = D1 / P0 = $2.88 / $32.73 = 0.0879, or 8.79%