8. Nonconstant growth stockAa AaAs companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, orvariable,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 ofthe company's stock.Consider the case of Portman Industries:Portman Industries just paid a dividend of $3.12 per share. The company expects the coming year to be veryprofitable, 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 riskValueTermpremium (RPM) is 6.00%, and Portman's beta is 1.90.Dividends one year from now (D1)Horizon value (P1)Assuming that the market is in equilibrium, use theIntrinsic value of Portman's stockinformation just given to complete the table.What is the expected dividend yield for Portman's stock today?9.92%12.40%11.92%13.88%

Calculate the rate of return as follows:

Answered: 8. Nonconstant growth stock Aa Aa As…

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN:9781285867977

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 7TCL

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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 $1.92 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 3.20% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Value Dividends one year from now (D₁)    Horizon value (Pˆ1P̂1)    Intrinsic value of Portman’s stock    The risk-free rate (rRFrRF)…
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 $3.12 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 3.20% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Value Dividends one year from now (D₁)    Horizon value (Pˆ1 )    Intrinsic value of Portman’s stock    The risk-free…
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 $1.92 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. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Value Dividends one year from now (D₁)    Horizon value (Pˆ1P̂1)    Intrinsic value of Portman’s stock    The risk-free rate (rRFrRF) is 3.00%, the market risk…
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 $3.12 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 3.20% per year.
1. A higher industry P/E will result in a(n)…A. Higher required returnB. Decrease in an industry’s business risk.C. Decrease in an industry’s growth rate.D. Increase in an industry’s liquidity risk.2. Industry analysis is important because…A. It is unusual for a firm in a troubled industry to perform well.B. There are substantial differences in stock market performances among industry groups.C. There is considerable dispersion in stock market performance among industry groups.D. All of the above3. Which of the following stages of the industry life cycle offers the highest potential returns.A. Start-upB. ConsolidationC. MaturityD. Relative decline cle
10.Which of the following statement on stock valuation is incorrect?a.In dividend discount model, the stock value is the present value of all future dividends.b.We may use the dividend discount model to value all firms. c.Enterprise value is the sum of equity and debt minus cash. d.We may use price-earnings ratio to compute the value to comparable firms.
For many companies, it is not appropriate to assume that dividends will grow at a constant rate. Most firms go through life cycles where they experience different growth rates during different parts of the cycle. For valuing these firms, the generalized valuation and the constant growth equations are combined to arrive at the nonconstant growth valuation equation: Basically, this equation calculates the present value of dividends received during the nonconstant growth period and the present value of the stock's horizon value, which is the value at the horizon date of all dividends expected thereafter. Quantitative Problem 3: Assume today is December 31, 2019. Imagine Works Inc. just paid a dividend of $1.10 per share at the end of 2019. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 5.5% annually. The company's cost of equity (rs) is 9%. Using the dividend growth model (allowing for nonconstant growth), what…
[multiple choice questions] INDO Inc. always pays all of its earnings as dividends, and therefore has no retained earnings. The same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity. The targeted capital structure consists of: common stock, preferred stock, and debt. Which of the following events will reduce WACC? a. The market risk premium is decreasing. b. Flotation costs associated with issuing new common stock increase. c. The company's beta is increasing. d. Inflation is expected to increase. e. The flotation costs associated with issuing preferred stock increase.
The future earnings are likely to withstand an economic downturn,is situation of? A. defensive companies and stock B. cyclical companies and stock C. Growth companies and stock
c) suppose Zenos Manufacturing is contemplating investing in a new business. An existing company in the target industry has an equity beta of 0.90 but is very conservatively financed with a market value, equity-to-value ratio 95%. Zenos intends to use an equity-to-value ratio of 30%. What beta should Zeno use in estimating a cost of capital in the new business. d) State a reason that the cost of external equity is greater than the cost of internal equity?
1. A well-researched valuation is timeless.(true or false with reason) 2. Firms with same correlation with the market portfolio may not have the same beta.(true or false with reason)3. Historical equity risk premium should be estimated using most recent data to reflect current conditions.(true or false with reason)4. A firm with high growth rate could still destroy shareholder value.(true or false with reason)5. Firms that do not pay dividends cannot be valued using the dividend discount model but can be valued using the residual income model.(true or false with reason)6. A company’s cost of debt is the contracted rate it pays on its outstanding debt.(true or false with reason)7. Free Cash Flow to Equity can be less than net income.(true or false with reason)8. An increase in stock price leads to lower implied cost of equity.(true or false with reason)9. The dividend discount model will generally undervalue stocks relative to free cash flow to equity model.(true or false with…
Price-earnings valuation multiples make the following strong assumptions: a. Earnings are persistent, not transitory. b. Current period earnings will be constant in the future. c. The cost of equity capital will remain constant in the future. d. All of these answer choices are correct. A firm's price-earnings ratio will a. increase sharply when a firm recognizes a temporary decrease in earnings per share. b. decrease sharply when a firm recognizes a temporary increase in earnings per share. c. Either an increase or a decrease can happen. d. Neither an increase nor a decrease can happen.

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