af/servlet/quiz?quiz action- takeQuiz&quiz; probGuid-ONAPCOA801010000004194edf00

Question

af/servlet/quiz?quiz action- takeQuiz&quiz; probGuid-ONAPCOA801010000004194edf00900008ctr- Fan.He-00278ick- Portman Industries just paid a dividend of $2.16 per share. The co 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. mpany expects the coming year to be very The risk-free rate (RF) is 4.00%, the market risk premium (RPH) is 4.80%, and Portman's beta is 2.00. Term Value Dividends one year from now (D,) Horizon value (P) Intrinsic value of Portman's stock 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? ? 8.32% 10.40% 11.45% 10.05% ? Now let's apply the resuits of your calculations to the following stuation: Portman has 1.100.000 shares outstanding, and Judy Davis, an investor, holds 16,500 shares at the current price computed above). Suppose Portman is considering issuing 137,500 new shares at a price of $20.48 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 $0.34 per share O s0.40 per share O $0.84 per share O so.49 per share Thus, Judy's investment will be diluted, and Judy will experience a total rch

Explanation / Answer

First of all lets calculate cost of capital

As per CAPM method

Rj = Risk free rate of return+ beta(Risk premium)

=4%+2(4.8%)

=4%+9.6%

=13.6%

Now let us find value of stock today

Expected Dividend yield = Dividend/Po

=2.506/24.092

=10.4%

Price of share after issue = 1100,000*24.092 + 137500*20.48 / ( 1100,000+137500)

=26501200+2816000 / 1237500

=23.69067

Reduction in value per share = 24.092-23.69067

=0.40$

Year Dividend PVIF @ 13.6% Present value 1 2.506 0.880 2.206 2 2.586 0.775 2.004 P2 = D3/Ke-g
=(2.585779)(1.032)/13.6%-3.2%
=2.668524/10.4% 25.659 0.775 19.883 P0 24.092

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.