Question

ack to Assignment Attempts: Keep the Highest: 13 6. 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 $1.44 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 3.20% per year. Term Value Dividends one year from now (D) Horizon value (P.) Intrinsic value of Portman's stock The risk-free rate (TRF) is 4.00%, the market risk premium (RPM) is 4.80%, and Portman's beta is 1.30. Assuming that the market is in equilibrium, use the information just given to complete the table. What is the expected dividend yield for Portman's stock today? 7.52% 5.63% 6.82% 7.04% Grade It Now Save & Continue Continue without saving

Answer 1

Given for Potman Industries,

Last dividend paid D0 = $1.44 per share

this year dividend growth rate = 16%

So, next year dividend D1 = D0*(1+g) = 1.44*1.16 = $1.67

after this, constant dividend growth rate g = 3.20%

Risk free rate = 4%

Market risk premium RPM = 4.80%

Beta of the company = 1.3

So, using CAPM, cost of equity Ke = Rf + Beta*RPM

So, Ke = 4 + 1.3*4.80 = 10.24%

So, Harizon value of stock at year 1 using constant dividend growth rate is

P1 = D1*(1+g)/(Ke-g) = 1.67*1.032/(0.1024-0.032) = $24.49

So, intrinsic value of Portman's stock today = P1/(1+Ke) = 24.49/1.1024 = $22.21

So, expected dividend yield for portman's stock today = D1/P0 = 1.67/22.21 = 7.52%

So, option A is correct.