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1. Portman Industries just paid a dividend of $2.16 per share. The company expec

ID: 2651156 • Letter: 1

Question

1. 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 12% 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 1.90. Assuming the market is equilibrium, use the information just given to find :

Term

Value

1a.Dividends one year from now (D1)

?

1b.Horizon Value

?

1c.Intrinsic value of portman’s stock

?

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

a. 7.98%

b. 5.95

c. 7.26%

d. 7.44%

3. Portman has 800,000 shares outstanding, and Judy Davis, an investor, holds 12,000 shares at the current price as just found. Suppose Portman is considering issuing 100,000 new shares at a price of $27.64 per share. If the new shares are sold to outside investors, by how much will Judy's investment in Portman be diluted on a per-share basis?

a. $1.13 per share

b. $0.54 per share

c. $0.46 per share

d. $0.66 per share

4. Thus Judy’s investment will be diluted, and Judy will experience a total _profit or less_ of ________.

a. $4212

b. $4860

c. $6480

d. $7776

Term

Value

1a.Dividends one year from now (D1)

?

1b.Horizon Value

?

1c.Intrinsic value of portman’s stock

?

Explanation / Answer

Cost of equity = Risk free rate +beta* market risk premiun

                        =3 % + (1.90*3.60)

                       = 3% +6.84 %

                          = 9.84%

1a)Dividend value one year from now = Current dividend (1+ growth)

                                                     =2.16 (1+.12)

                                                     = $ 2.4192

1b) dividend of 2 nd year = 2.4192 (1+.024)

                                    = 2.4773

Horizon value at the end of 1 st year /Beginning of 2 nd year = Dividend / (cost of equity - growth)

                                                                                      = 2.4773 /(.0984 -.024)

                                                                                       = 2.4773/.0744

                                                                                         = $ 33.2970

1c)Intrinsic value of stock = Present value of dividend at the end of 1 year @ 9.84%

                                        ( 2.4192 +33.2970)*.9104

                                    =35.7162*.9104

                                      $ 32.52 per share

2)Expected dividend yield = Dividend after one year / current price

                                        = 2.4192/32.52

                                      = .0744 or 7.74%

correct option is "D" =7.44%

3) Market capitalisation after new issue =(old issue+value of new issue)

                                                      = (800000*32.52)+(100000*27.64)

                                                      = 26016000+2764000

                                                   = $ 28780000

Market price per share after new issue =market value after new issue /number of share outstanding after new issue

                                                         = 28780000/ 900000

                                                            = $ 31.98

so dilution per share = 31.98-32.52

                                 = $ (.54 )per share

so correct opton is "B"

4) so therefore the loss due to dilution = Number of shares held by judy * dilution per share

                                                       = 12000* -.54

                                                       = (6480)

so correct option is "C" = 6480