. Nonconstant growth stock Aa Aa As companies evolve, certain factors can drive
ID: 2783096 • Letter: #
Question
. 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 (Rr) is 5.00%, the market risk premium (RPM) is 6.00%, and Portman's beta is 1.50. Term Value Dividends one year from now (D1) Horizon value (P1) 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? o 8.00% O 10.00% o 9.61% O 10.96%Explanation / Answer
Calculation of intinsic value at P1:
Dividend at the end of second year D2= 1.68*1.2*1.04= 2.09664
Expected return= Risk free+ beta*risk premium= 0.05+ 1.5*0.06= 0.14
Horizon value P1= D2/Ke-g = 2.09664/(0.14-0.04)= 20.9664
Intrinsic value = (Horizon value P1+ dividend next year D1)/(1+expected return) = 20.9664+ 1.68*1.2 / 1.14= 20.23074
Dividend next year D1= 1.68*1.2= 2.016
Expected dividend yield= Dividend next year D1/intrinsic value= 2.016/20.9664= 10%
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