As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause theexpected 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 $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expectedto grow by 12.00% 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.Assuming that the market is in equilibrium, use the information just given to complete the table.TermDividends one year from now (D1)Horizon value (P1)Intrinsic value of Portman's stockValueThe risk-free rate (TRF) is 3.00%, the market risk premium (RPM) is 3.60%, and Portman's beta is 1.70.What is the expected dividend yield for Portman's stock today?6.73%5.38%○ 7.17%6.57%

Option a: This option is incorrect because the given answer to this option is not the right answer…

Answered: As companies evolve, certain factors…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose the profitable company, Hermes, Inc., previously calculated its external financing needs (EFN) to be $18,200,000. What will happen to the EFN if management now decides to decrease the dividend payout ratio from 35.00% to 25.00%? (1) It will increase to some value greater than $18,200,000. (2) It will fall to some value lower than $18,200,000. (3) It will remain at $18,200,000. (4) The answer depends on Hermes, Inc.’s growth rate in sales. (5) The answer depends on Hermes, Inc.’s profit margin.
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 $3.12 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.00% 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. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Value Dividends one year from now (D₁) ($3.66, 4.00, 3.49, 3.57) Horizon value (Pˆ1P̂1) ($148.75, 76.54, 78.29, 51.29) Intrinsic value of Portman’s stock ($76.46, 83.15,…
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