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ookmarks People Window Help Aplia: Student Question s://courses.aplia.com/af/servlet/quiz?quiz action takeQuiz&quiz; probGuid QNAPCOA8010100000041ca26800b000 Attempts: 1 Keep the Highest: 1/4 8. Nonconstant growth stock 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 the company's stock. of Consider the case of Portman Industries: Portman Industries just paid a dividend of $2.16 per share. The company expects the coming year to be profitable, and its dividend is expected to grow by 20.00% over the next ye Portman's dividend is expected to grow at a constant rate of 4.00% per year. very ar. After the next year, though, The risk-free rate (nr) is 5.00%, the market risk premium (RPn) is 6.00%, and Portman's beta is 1.90. Term Value Dividends one year from now (D1) Horizon value (P) 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? ? 13.88% O 12.4096 ? 9.92% ? 11.92%

Explanation / Answer

1. Current Dividend,D0 = $2.16

Next year dividend will be 20% more than the current dividend.

D1 = $2.16 x 1.20 = $2.592

2. Now, the growth rate will be constant at 4%

D2 = $2.592 x 1.04 = 2.69568

Required Rate of Return = Risk-Free Rate + Beta*Market Risk Premium

= 5% + 1.9*6% = 16.4%

P1 = D2/(required return - constant growth rate)

= 2.69568/(0.164-0.04) = $21.74

3. P0 = 2.592/1.164 + 21.74/1.164

= $20.90

4. Expected Dividend Yield = D1/P0

= $2.592/$20.90 = 0.124 or 12.4%

Hence, Correct Option is B.

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