8. 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 companys expected growth rate to increase or decrease, thereby affecting the results of the valuation model. For companies in such situations, you would refer to the nonconstant growth model for the valuation of the companys stock.

Consider the case of Purple Whale Foodstuffs Inc.:

Purple Whale Foodstuffs Inc. (PWFI) 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 12.00% over the next year. After the next year, though, Purple Whales dividend is expected to grow at a constant rate of 2.40% per year.

Complete the following table, assuming that the market is in equilibrium, and:

	The risk-free rate (rRFRF) is 3.00%
	The market risk premium (RPMM) is 3.60%, and
	Purple Whales beta is 1.70

Note: Do not round intermediate calculations.

Term	Value
	(Dollars)
Dividends one year from now (D11)
Horizon Value (HV)
Intrinsic Value

Which of the following most closely approximates the expected dividend yield for Purple Whales stock today?

5.38%

6.72%

6.56%

7.16%