Portman industires just paid a divident of $2.40 per share. The company expects
ID: 2638976 • Letter: P
Question
Portman industires just paid a divident of $2.40 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 teh next year, though, Portman's divident 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 pormans beta is 1.90.
Assuming taht the market is in equilibrium
What are the dividends one year from now________
What is the Horizon value__________
What is the Intrinsic value of Portman's stock_______
What is the expected dividend yield for portmant stock today?
a. 5.95% b. 7.44% c. 7.26% d7.98%
Explanation / Answer
1. dividends one year from now = Dividend today* dividend growth rate
= 2.4*1.12
so, dividends one year from now =$2.688
2.Horizon value of share is P1
then
P1 = D2/(R-g) =D1*1.024 / (.0984 - .024)=2.688*1.024 / (.0984 - .024)
P1 = 36.996
3.
Required rate of return (As per CAPM model) = Risk free return + Beta*Risk premium
R = 3% +1.9*3.6% = 9.84%
Suppose, Intrinsic value of Portman's stock is P0.
then P0 = D1/(1+R) + P1/(1+R)
P1 = D2/(R-g) =D1*1.024 / (.0984 - .024)=2.688*1.024 / (.0984 - .024)
P1 = 36.996
So P0 =2.688/1.0984 + 36.996/1.0984 = $36.13
4.
Expected dividend yield = Dividend / Share price = 2.688/36.13 = 7.44%