Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

8. Nonconstant growth stock Aa Aa As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable,

image text in transcribedimage text in transcribed

8. Nonconstant growth stock Aa Aa 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 $2.64 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 (Rp) is 3.00%, the market risk premium (RPM) is 3.60%, and Portman's beta is 1.70. Assuming that the market is in equilibrium, use the Term Value I Dividends one year from now (D) Horizon value (P1) Intrinsic value of Portman's stock information just given to complete the table. What is the expected dividend yield for Portman's stock today? 6.56% 0 6.72% 7.16% 5.38% Which of the following statements accurately describes the relationship between earnings and dividends when ll other factors are held constant? O Long-run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company. Growth in earnings requires growth in dividends. O Retaining a higher percentage of earnings will result in a higher growth rate

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Small Fund Management

Authors: K. K.

1st Edition

979-8866391837

More Books

Students also viewed these Finance questions