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11 September, 07:46

Portman Industries just paid a dividend of $2.16 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. The required rate of return is 13.6%. Assuming that the market is in equilibrium.

Required:

What is the expected dividend yield for Portman's stock today?

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Answers (1)
  1. 11 September, 09:40
    0
    Expected Dividend Yield is 10.4%

    Explanation:

    As we know that the Expected Dividend Yield for Portman's Stock can be calculated using the following formula:

    Expected Dividend Yield = [D0 x (1 + g) / Intrinsic Value (Step1) ] * 100

    Here

    Dividend just paid is $2.16 per share

    The growth rate for the Portman's stock is 16% for the first year

    Ke is 13.6%

    Intrinsic Value = $24.09 (See Step 1)

    By putting the above values in the above equation, we have:

    Expected Dividend Yield = [$2.16 x (1 + 0.16) / $24.09] x 100

    = 10.4%

    Step 1. Intrinsic Value can be calculated using the following formula:

    Intrinsic Value = D1 / (1 + r) ^1 + Horizon Value (Step 2) / (1 + r) ^1

    Here

    Growth (g) will be 3.2% for the year 2 because D2 = D1 * (1 + g)

    Horizon value = D1 * (1 + g) / (Ke - g) = $2.5056 * (1 + 3.2%) / (13.6% - 3.2%)

    = $2.5858 / 0.0752 = $24.86 per share

    So by putting the above values in the step 1, we have:

    = $2.5056 / (1 + 0.136) 1 + $24.86 / (1 + 0.136) 1

    = $24.09 per share
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