1. Portman Industries just paid a dividend of $3.60 per share. The company expec
ID: 2715285 • Letter: 1
Question
1. Portman Industries just paid a dividend of $3.60 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. The risk-free rate is 5.00%, the market risk premium is 6.00%, and Portman's beta is 1.80. 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. 11.80
b. 13.14
c. 9.44
d. 11.35
Term
Value
1a.Dividends one year from now (D1)
?
1b.Horizon Value
?
1c.Intrinsic value of portman’s stock
?
Explanation / Answer
1a.Dividends one year from now (D1)
Dividends one year from now (D1) = D0*(1+g)
Dividends one year from now (D1) = 3.60*(1+20%)
Dividends one year from now (D1) = $ 4.32
1b.Horizon Value
As per CAPM
Re = risk-free rate + market risk premium*beta
Re = 5 + 6*1.80
Re = 15.80
Horizon Value = D2/(Re-g)
Horizon Value = 4.32*1.04/(15.8%-4%)
Horizon Value = $ 38.07
1c.Intrinsic value of portman’s stock
Intrinsic value of portman’s stock = Dividends one year from now (D1) /(1+re) + Horizon Value/(1+re)^2
Intrinsic value of portman’s stock = 4.32/1.158 + 38.07/1.158
Intrinsic value of portman’s stock = $ 36.61
2. What is the expected dividend yield for Portman's stock today?
Expected dividend yield for Portman's stock today = Dividends one year from now (D1)/Intrinsic value of portman’s stock
Expected dividend yield for Portman's stock today = 4.32/36.61
Expected dividend yield for Portman's stock today = 11.80%
Answer
a. 11.80
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.