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Safari File Edit View History Bookmarks Window Help ng.cengage.com Larry Nelson Holds 1,000 Shares Of General Electri.... Chegg.com in June 2010, WSFS Financial Corporation Filed For.. . Chegg.com MINDTAP Frum Cengage Ch 07: Assignment- Common Stock: Characteristics, Valuation, and Issuance 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 $1.92 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 c 3.20% per year. Investors expect a required rate or return of 11.68% on Portman's stock. Term Value Dividends one year from now (D) $2.2272 Value of Portman's stock at the end of the nonconstant dividend- growth period Portman's stock price $27.10 Assuming that the market is in equilibrium, use the information just given to complete the table. $26.26 What is the expected dividend yield for Portman's stock today? 6.78% 8.22% o 9.1896 @ 8.48% Now let's apply the results of your calculations to the following situation:Explanation / Answer
NOTE: The solution solves provided is only for the last sub-part as the question already has the earlier sub-parts solved (correctly).
Current Stock Price = $ 26.26 and Number of Shares Outstanding = 200000
Current Market Value of Stock = 200000 x 26.26 = $ 5252000
New Issue Price = $ 22.32 and Number of Shares Issued = 25000
Market Value of New Issue = 22.32 x 25000 = $ 558000
Total Market Value = 5252000 + 558000 = $ 5810000
Total Number of Shares Outstanding = 200000 + 25000 = 225000
New Share Price = 5810000 / 225000 = $ 25.82
Dilution of Price per Share = Current Share Price - New Share Price = 26.26 - 25.82 = $ 0.437 ~ $ 0.44
Hence, the correct option is (d).
Number of Shares held by Judy = 3000
Judy's Total Loss owing to price dilution = 3000 x 0.44 = $ 1320 approximately.
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