Question

HW 08-Stocks and Their Valuation 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 $2.16 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. The risk-free rate (raE) is 5.00%, the market risk Value Term premium (RPM) is 6.00%, and Portman's beta is 1.70. Dividends one year from now (D1) Horizon value (P) Assuming that the market is in equilibrium, use the information just given to complete the table. Intrinsic value of Portman's stock What is the expected dividend yield for Portman's stock today? 11.20% 10.77% O 12.41 % 8.96%

Answer 1

D1 =Current Dividend *(1+growth 1)=2.16*(!+20%) =2.592 or 2.59
Cost of Equity using CAPM =Risk Free Rate+Beta*(Market Return-Risk Free rate) =5%+1.70*6% =15.20%

Horizon Value(P1) =D1*(1+Growth2)/(Required Rate-Growth2) =2.592*(1+4%)/(15.20%-4%) =24.0686 or 24.07
Intrinsic Value of Portman's Stock =2.592/(1+15.2%)+24.0686/(1+15.20%) =23.14

Expected Dividend Yield Today =Dividend next year/Price today =2.592/23.14 =11.20%
Option a is correct option