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 equilibriumWhat 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%
d. 7.98%

Answer 1

dividend one year D1 = $2.688

horizon value P1 = $36.9961

intrinsic value of portman stock P = $36.1290

dividend yield = 7.44 %

so correct option is b

Step-by-step explanation:

given data

dividend = $2.40 per share

expected to grow = 12%

constant rate = 2.40%

risk free rate = 3.00%

market risk premium = 3.60%

pormans beta = 1.90

solution

we find first dividend one year from now is

dividend one year = D × (1+g) ..................1

here D is given dividend and g is expected to grow rate put here value we get

dividend one year = $2.40 × (1+12%)

dividend one year D1 = $2.688

and

now we find cost of equity that is

cost of equity Ke = Rf + β ×market risk premium ..............2

Rf is risk free rate and β is pormans beta put these value

cost of equity Ke = 3% + (1.9 × 3.6%)

cost of equity Ke = 0.0984 = 9.84 %

so

horizon value is here

horizon value =
`(D1*(1+g))/(Ke-g)` ..................3

put here all value

horizon value =
`(2.688*(1+0.0240))/(0.0984-0.0240)`

horizon value P1 = $36.9961

and

intrinsic value of portman stock is

P =
`(D1)/((1+Ke)^1) +(P1)/((1+Ke)^1)` ...................4

put here value

P =
`(2.688)/((1+0.0984)^1) +(36.9961)/((1+0.0984)^1)`

intrinsic value of portman stock P = $36.1290

and

dividend yield is here express as

dividend yield =
`(D1)/(P)` ......................5

put here value

dividend yield =
`(2.688)/(36.1290)`

dividend yield = 7.44 %

so correct option is b