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Aa Aa E 7. Nonconstant growth stock As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or
Aa Aa E 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 company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.20 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, Portman's dividend is expected to grow at a constant rate of 4.00% per year The risk-free rate (rRF) is 5.00%, the market risk Value Term premium (RPM) is 6.00%, and Portman's beta is 0.90. Dividends one year from now (D1) Horizon value (P1) Assuming that the market is in equilibrium, use the Intrinsic value of Portman's stock information just given to complete the table. Now let's 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 $19.13 per share. If the
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