es evolve, certain factors can drive sudden growth. This may lead to a period of

Question

es evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, As compan 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 $3.60 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 3.20% per year. The risk-free rate (re) is 4.00%, the market risk premium (RP) is 4.809%, and Portman's beta is 1 Term Value .22 Dividends one year from now (Di) 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? 5.25%. 6.36% 6.56% 6.98% Now let's apply the results of your calculations to the following situation: Portman has 600,000 shares outstanding, and Judy Davis, an investor, holds 9,000 shares at the current price (computed above). Suppose Portman is considering issuing 75,000 new shares at a price of $54.11 per share. If the new shares are sold to outside investors, by how much will Judy's investment in Portman Industries be diluted on a per-share basis?

Explanation / Answer

rate of return

risk free rate+(market risk premium)*beta

4+(4.8)*1.2

9.76

terminal value of stock

expected dividend in year 2 /(required return-growth rate)

4.3096/(9.76%-3.20%)

65.69512195

intrinsic value or present value of stock

(dividend in year 1+terminal value)/(1+r)^n

(4.176 + 65.695)/1.0976^1

63.65798105

expected dividend in year 1

3.6*1.16

4.176

expected dividend in year 2

4.176*1.032

4.309632

D1

4.176

horizon value

65.69512

Instrinsic value

63.66

expected dividend yield = expected dividend in year 1/ intrinsic value

4.176/63.66

6.56%

present value of Judy davis

9000*63.66

572940

value of equity after new issue

(600000*63.66)+(75000*54.11)

42254250

value of equity per share after new issue

42254250/675000

62.59889

value of Judy Davis shares after new stock issue

62.598*9000

563390

dilution in value of Judy davis share

572940-563390

9550

dilution per share

9550/9000

1.06

rate of return

risk free rate+(market risk premium)*beta

4+(4.8)*1.2

9.76

terminal value of stock

expected dividend in year 2 /(required return-growth rate)

4.3096/(9.76%-3.20%)

65.69512195

intrinsic value or present value of stock

(dividend in year 1+terminal value)/(1+r)^n

(4.176 + 65.695)/1.0976^1

63.65798105

expected dividend in year 1

3.6*1.16

4.176

expected dividend in year 2

4.176*1.032

4.309632

D1

4.176

horizon value

65.69512

Instrinsic value

63.66

expected dividend yield = expected dividend in year 1/ intrinsic value

4.176/63.66

6.56%

present value of Judy davis

9000*63.66

572940

value of equity after new issue

(600000*63.66)+(75000*54.11)

42254250

value of equity per share after new issue

42254250/675000

62.59889

value of Judy Davis shares after new stock issue

62.598*9000

563390

dilution in value of Judy davis share

572940-563390

9550

dilution per share

9550/9000

1.06

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