7. Nonconstant growth stock

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 companys 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 expected to grow by 20.00% over the next year. After the next year, though, Portmans dividend is expected to grow at a constant rate of 4.00% per year. (Note: Do not round your intermediate calculations.)

Term	Value
Dividends one year from now (D1D1)	A. 2.8800 B. 3.1150 C. 2.9952 D. 3.5942
Horizon value (P1)P1	A. 34.04 B. 74.88 C. 23.40 D. 32.73
Intrinsic value of Portmans stock	A. 38.13 B. 30.18 C. 39.28 D. 32.73

The risk-free rate (rRFrRF) is 5.00%, the market risk premium (RPMRPM) is 6.00%, and Portmans beta is 1.30.

Assuming that the market is in equilibrium, use the information just given to complete the table.

What is the expected dividend yield for Portmans stock today?

A. 8.80% B. 7.04% C. 9.54% D. 8.46%

Now lets apply the results of your calculations to the following situation:

Portman has 500,000 shares outstanding, and Judy Davis, an investor, holds 7,500 shares at the current price (computed above). Suppose Portman is considering issuing 62,500 new shares at a price of $27.82 per share. If the new shares are sold to outside investors, by how much will Judys investment in Portman Industries be diluted on a per-share basis?

A. $0.55 per share B. $0.68 per share C. $0.47 per share D. $1.16 per share

Thus, Judys investment will be diluted, and Judy will experience a total __PROFIT or LOSS_____ of ________ .

A. $4,124.00 B. $2,681.25 C. $3,093.75 D. $4,950.00