As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, gro

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As companies evolve, certain factors can drive sudden growth.This may lead to a period of nonconstant, or variable, growth. Thiswould cause the expected growth rate to increase or decrease,thereby affecting the valuation model. For companies in suchsituations, you would refer to the variable, or nonconstant, growthmodel 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. Thecompany expects the coming year to be very profitable, and itsdividend is expected to grow by 16.00% over the next year. Afterthe next year, though, Portman’s dividend is expected to grow at aconstant rate of 3.20% per year.
Assuming that the market is in equilibrium, use the informationjust given to complete the table.
Term
Value
The risk-free rate (rRFrRF) is 4.00%, the market risk premium(RPMRPM) is 4.80%, and Portman’s beta is 1.30.
What is the expected dividend yield for Portman’s stocktoday?
6.81%
7.03%
5.62%
7.51%