Nonconstant growth stock As companies evolve, certain factors can drive sudden g
ID: 2468875 • Letter: N
Question
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 $1.20 per share. The company expects the coming year to be very profitable, and its annual dividend is expected to grow by 12.00% over the next year. After the next year, however, Portman’s dividend is expected to grow at a constant rate of 2.40% per year.
Given this data—and assuming the market is in equilibrium—complete the following table:
Given this information, the expected dividend yield for Portman’s stock today is ----------- .
Portman has 200,000 shares outstanding, and Judy Davis, an investor, holds 3,000 shares at the current price as just computed. Suppose Portman is considering issuing 25,000 new shares at a price of $14.58 per share. If all of the new shares are sold to outside investors, then Judy’s investment in Portman will be diluted by ------------ per share, and she will experience a total --------- of ----------- .
Term Value Dividends one year from now ( ) ----------------------------------------------------------------- Horizon value (Stock’s value at end of the nonconstant dividend growth period — ) ----------- Intrinsic value (Theoretical market price) --------------------------------------------------------Explanation / Answer
Dividend Yield = D/P
D = dividends for the period.
P = Initial price for the period.
Portman has 200,000 Shares
Judy Davis holds 3,000 Shares
Portman is considering issuing 25,000 Shares
Therefore = 14.58/25000 = 0.058% Shares allocated.
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