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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,
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
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