1. Portman Industries just paid a dividend of $2.16 per share. The company expec
ID: 2651130 • Letter: 1
Question
1. Portman Industries just paid a dividend of $2.16 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 2.40% per year. The risk-free rate is 3.00%, the market risk premium is 3.60%, and Portman's beta is 1.90. 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. 7.98%
b. 5.95
c. 7.26%
d. 7.44%
3. Portman has 800,000 shares outstanding, and Judy Davis, an investor, holds 12,000 shares at the current price as just found. Suppose Portman is considering issuing 100,000 new shares at a price of $27.64 per share. If the new shares are sold to outside investors, by how much will Judy's investment in Portman be diluted on a per-share basis?
a. $1.13 per share
b. $0.54 per share
c. $0.46 per share
d. $0.66 per share
4. Thus Judy’s investment will be diluted, and Judy will experience a total _profit or loss_ of ________.
a. $4212
b. $4860
c. $6480
d. $7776
Please show how you arrived to the answer. Thanks!
Term
Value
1a.Dividends one year from now (D1)
?
1b.Horizon Value
?
1c.Intrinsic value of portman’s stock
?
Explanation / Answer
Answer:
1a. Dividends one year from now (D1) = Current Dividend *(1+ Growth rate)
= 2.16 * (1+0.12)
= $2.4192
1b. Horizon Value = Expected Dividend / (Required rate – Growth rate)
Required rate = Risk free rate + Beta * Market Risk Premium
= 3% + 1.90*3.6%
= 9.84%
Hence Horizon Value =
= 2.4192 * (1+0.024) / (0.0984 -0.024)
= 2.47726 / 0.0744
=$33.2965
1c. Intrinsic value of portman’s stock = Present value of (Horizon value + D1)
= (33.2965 + 2.4192) / (1+0.0984)^1
= 35.7157 / 1.206483
= $29.60
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