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Aplia: Student Question C fi courses.aplia.com/af/servlet/quiz?ctx syildiz-0005&quiz; action Quiz&quiz; prob Guid 80101000 2e8c4490 0000&C; 1460948906107 0AAA0559014F 7497 449EC4F30000 6. Nonconstant growth stock Aa Aa 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 $1.68 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 (rRF) is 5.00%, the market risk Term Value premium (RPM) is 6.00%, and Portman's beta is 1.20 Dividends one year from now (D1) $2.0160 Horizon value (P1) Assuming that the market is in equilibrium, use the Intrinsic value of Portman's stock information just given to complete the table. What is the expected dividend yield for Portman's stock today? 7.88% O 8.20% 6.56% O 8.85% Suggestions Session 59:28 Timeout 10:0

Explanation / Answer

Rs =Rf +[Beta *MP]

        = 5+ [1.2*6 ]

         = 5 + 7.2 = 12.2%

D1 =D0(1+g1)

    = 1.68 (1+ .20 ) = $ 2.016 per share

Horizon value = D1(1+g)/(WACC-G)

                  = 2.016 (1+ .04)/(.122-.04)

                = 2.016 *1.04 / .082

                 = $ 25.5688

Intrinsic value = PVF@12.2%,1 *CF

                 = .89127 * (25.5688+ 2.016)

                = .89127 * 27.5848

                = $ 24.5855 per share [rounded to 24.59 ]

Dividend yield = 2.016 / 24.5855 = .082 or 8.2%

correct option is "B"

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