1. Portman Industries just paid a dividend of $2.16 per share. The company expec
ID: 2651156 • 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 less_ of ________.
a. $4212
b. $4860
c. $6480
d. $7776
Term
Value
1a.Dividends one year from now (D1)
?
1b.Horizon Value
?
1c.Intrinsic value of portman’s stock
?
Explanation / Answer
Cost of equity = Risk free rate +beta* market risk premiun
=3 % + (1.90*3.60)
= 3% +6.84 %
= 9.84%
1a)Dividend value one year from now = Current dividend (1+ growth)
=2.16 (1+.12)
= $ 2.4192
1b) dividend of 2 nd year = 2.4192 (1+.024)
= 2.4773
Horizon value at the end of 1 st year /Beginning of 2 nd year = Dividend / (cost of equity - growth)
= 2.4773 /(.0984 -.024)
= 2.4773/.0744
= $ 33.2970
1c)Intrinsic value of stock = Present value of dividend at the end of 1 year @ 9.84%
( 2.4192 +33.2970)*.9104
=35.7162*.9104
$ 32.52 per share
2)Expected dividend yield = Dividend after one year / current price
= 2.4192/32.52
= .0744 or 7.74%
correct option is "D" =7.44%
3) Market capitalisation after new issue =(old issue+value of new issue)
= (800000*32.52)+(100000*27.64)
= 26016000+2764000
= $ 28780000
Market price per share after new issue =market value after new issue /number of share outstanding after new issue
= 28780000/ 900000
= $ 31.98
so dilution per share = 31.98-32.52
= $ (.54 )per share
so correct opton is "B"
4) so therefore the loss due to dilution = Number of shares held by judy * dilution per share
= 12000* -.54
= (6480)
so correct option is "C" = 6480
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.