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: 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. 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 The risk-free rate (TR) is 5.00%, the market risk premium (RPM) is 6.004, and Portman's beta s 1.40. What is the expected dividend yield for Portman's stock today? 10.26%

Answer 1

The answer for above problem is explained below.

Dividends one year from now CD,) D. - Do *(1+9) Cheering Di = $2.16 x C1+ 0,20) D = $2.16 x 1.20 Di = 8 2.592 ]per share Horizon Value (PR) Cost of equity (ke) = R + [Bx Market Bay - cxe) = Rft le < sharket risk t o ? premicem J a) Ke = 5%+(1.406) a ke = 5% + 8.4% z Ke = 13.4:6 = P = D. (1+3) /(ke-3).

Horizon value (P) s $2.592 x C1+ 0.04) [0.134 - 0.04 ] $ 2.69568 0.094 .: Horizon Value (P) - $ 28.677 per shave Ons Intrinsic value of port man's Stock CP] Horizon value Po = cit'+ [148]! Po = $2.592 Sitoti Po + $28.677 [17 0.134)' [1+ 0.134) Po = ($ 2.2851] +($28. 288]

[P] = $ 27.514 .: Intrinsic value of post man's Stock = ($27.574 Expected Dividend yield - $ 2-592.7 x 100 1 X 100 $27.574 ) = 19.41% Expected Dividend Yield -9.41% Term Value Dividends one year from now (D) $ 2.592 per share Horizon value CP.) $28. 677 per share Intrinsic value of portman's stock & 27.574 pershak