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Portman Industries just paid a dividend of $1
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% 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%, the market risk premium (RPM) is 6%, and Portman's beta is 1.20.
Please calculate:
Dividends one year from now (D1)
Horizon value (P1)
Intrinsic value of Portman's stock
What is the expected dividend yield for Portman's stock today?
Expert Solution
Computation of the dividend one year from now (D1):-
D1 = D0*(1+Growth rate)
= $1.68 * (1 + 20%)
= $2.02
Computation of the horizon value (P1):-
D2 = D1 * (1 + Growth rate)
= $2.02*(1+4%)
= $2.10
P1 = D2/(Required return - Growth rate)
= $2.10 / (12.20% - 4%)
= $25.57
Computation of the intrinsic value of stock (P0):-
Intrinsic value of stock = ($2.02/(1+12.20%)^1) + ($25.57/(1+12.20%)^1)
= ($2.02/1.1220) + ($25.57/1.1220)
= $1.80 + $22.79
= $24.59
Computation of the expected dividend yield:-
Dividend yield = D1 / P0
= $2.02 / $24.59
= 8.20%
Working note:-
Required return = Risk free rate + (Beta * Market risk premium)
= 5% + (1.20 * 6%)
= 5% + 7.20%
= 12.20%
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