As companies evolve, certain factors can drive sudden growth. This may lead to a period of…

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. (Note: Do not round your
intermediate calculations.)
Dividends one year from now (D1) _______ a.$2.2548 b.$2.1504
c.$2.4662 d.$2.2020
Horizon value (Pˆ1) ________ a.$41.70 b.$40.73 c.$28.67
d.$91.75
Intrinsic value of Portman’s stock ________ a.$40.72 b.$44.84
c.$48.86 d.$38.73
The risk-free rate (rRF) is 3.00%, the market risk premium (RPM) is
3.60%, and Portman’s beta is 1.30. 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.5.28%
b.5.16%
c.5.55%
d.4.22%
Now let’s apply the results of your calculations to the following
situation: Portman has 400,000 shares outstanding, and Judy Davis,
an investor, holds 6,000 shares at the current price (computed
above). Suppose Portman is considering issuing 50,000 new shares at
a price of $34.61 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.$0.58 per share
b.$0.68 per share
c.$0.84 per share
d.$1.43 per share
Thus, Judy’s investment will be diluted, and Judy will experience a
total ______ (profit/loss) of _______ ($2652, $3060, $4080,
$4896).