Question

Portman Industries just paid a dividend of $1.20 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 2.40% per year. The risk free rate is 3.00%, the market risk premium is 3.60% and Portman's beta is 1.10. Assuming that the market is at equalibrium, complete the table.

What is the expected dividend yield for Portman's stock today?

If the new shares are sold to investors, how much will Judy's investment be diluted?

Thus, Judy's investment will be diluted and and Judy will experience a total _______ (profit/loss) of $_______.

Portman Industries just paid a dividend of $1.20 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 2.40% per year. Value The risk-free rate (PRF) is 3.00%, the market risk premium (RPM) is 3.60%, and Portman's beta is 1.10. Term Dividends one year from now (D1) Horizon value (1) Intrinsic value of Portman's stock $29.47 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? O O 4.76% 4.45% 3.65% 4.56% Now let's apply the results of your calculations to the following situation: Portman has 400,000 shares outstanding, and Judy Davis, an investor, holds 6,000 shares at the current price (computed above). Suppose Portman is considering issuing 50,000 new shares at a price of $25.06 per share. If the new shares are sold to outside investors, by how much will Judy's investment in Portman Industries be diluted on a per-share basis? O $0.42 per share $0.49 per share $1.03 per share $0.60 per share Thus, Judy's investment will be diluted, and Judy will experience a total of

Answer 1

Market capitalisation rate = Rf + beta x market premium 6.96% 0.03+(1.1*0.036) Year Cash flows $1.34 $30.18 pv @ 6.96% 0.93493 0.93493 1.2*1.12 (1.34*1.024)/(0.0696-0.024) Value of the stock Present value $1.26 $28.22 $29.47 Price at year 1 Answers: Dividend one year from now D1 Horizon value (p1) Intrinsic value $1.3440 $30.18 $29.47 Expected dividend yield = 4.56% [ 1.344 = 29.47] New price per share = $28.98 ((400000*29.47)+(50000*25.06))/450000 Diluted by = Per share $0.49 (29.47-28.98) total loss of $294,000 6000*49