Question

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 $3.1200 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.0000% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 2.4000% per year.

Assuming that the market is in equilibrium, use the information just given to complete the table. (Note: Do not round intermediate calculations. Round your final answers to four decimal places.)

Term	Value
Dividends one year from now (D₁)
Horizon value (P̂1)
Intrinsic value of Portman’s stock

The risk-free rate (rRF) is 3.00%, the market risk premium (RPM) is 3.6000%, and Portman’s beta is 1.1000.

What is the expected dividend yield for Portman’s stock today?

4.76%

4.56%

3.65%

4.45%

Answer 1

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 3 + 1.1 * (3.6)

Expected return% = 6.96

	Required rate=	6.96%
Year	Previous year dividend	Dividend growth rate	Dividend in 1 yr	Horizon value	Total Value	Discount factor	Discounted value
1	3.12	12.00%	3.4944	78.4707	81.9654	1.0696	76.6315
	Long term growth rate (given)=	2.40%			Intrinsic value	Sum of discounted value =	76.6315

Where
Current dividend =	Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend	+ horizon value (only for last year)
Horizon value =	Dividend Current year 1 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=	(1+ Required rate)^corresponding period
Discounted value=	total value/discount factor

Dividend yield = dividend in 1 year/stock price =3.4994/76.6315=4.56%