Question

Portman Industries just paid a dividend of $1.68 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 (Rr) is 5.00%, the market risk premium (RPM) is 6.00%, and Portman's beta is 0.90 Term Value Dividends one year from now (Di Horizon value (P1) Intrinsic value of Portman's stock Assuming that the market is in equilibrium, use the information just given to complete the table What is the expected dividend yield for Portman's stock today? a. 6.15% b. 5.12% c. 6.79% d. 6.40% 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 $26.78 per share. If the new shares are sold to outside investors, by how much will Judy's investment in Portman Industries be diluted on a per-share basis? a. $0.52 per share b. $0.44 per share c. $0.64 per share d. $1.09 per share Thus, Judy's investment will be diluted, and Judy will experience a total:_____.

Answer 1

Answer:

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

d. 6.40%

Suppose Portman is considering issuing 62,500 new shares at a price of $26.78 per share. If the new shares are sold to outside investors, by how much will Judy's investment in Portman Industries be diluted on a per-share basis?

a. $0.52 per share

Thus, Judy's investment will be diluted, and Judy will experience a total loss of $0.52 x 7,500 = $3,900

Explanation:

cost of equity = Re = risk free rate of return + (Beta × market premium) = 5% + (0.90 x 6%) = 10.4%

dividend in one year = $1.68 x 120% = $2.016

intrinsic stock price = $2.016 / (10.4% - 4%) = $31.50

expected dividend yield = dividend / stock price = $2.016 / $31.50 = 6.4%

Judy's loss per share = ($31.50 - $26.78) x (62,500 / 562,500) = $0.5244