Consider the case of Portman Industries: Portman Industries just paid a dividend

Question

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 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. The risk-free rate (Rr) is 3.00%, the market risk premium (RPM) is 3.60%, and Portman's beta is 0.90. Term Value Dividends one year from now (D) $4.0320 $107.52 Intrinsic value of Portman's stock $101.20 Horizon value (P1) 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? 3.07% O 3.98% O 3.84% 3.75%

Explanation / Answer

Solution: 3.84%

Working:

Dividends one year from now (D1): 3.60 * 1.12 = 4.032

Rs = 3 + 3.6*0.9 = 6.24

Horizon value (P1): 4.032 * (1 + .024) / (6.24% - 2.4%) = 107.52

Intrinsic value of Portman’s Stock =3.7958+ 101.205 = 105

Non-linear = 3.60 * 1.12 / 1.0624 = 3.7958

Linear = 107.52 / 1.0624 = 101.205

Expected dividend yield for Portman's stock today = 4.032/ 105= 3.84%

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