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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 $1.92 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. (Note: Do not round yourintermediate calculations.)

Horizon Value (two decimals)

Intrinsic value (two decimals)

The risk-free rate (rRFrRF) is 4.00%, the market risk premium(RPMRPM) is 4.80%, and Portman’s beta is 2.00.

Assuming that the market is in equilibrium, use the informationjust given to complete the table.

What is the expected dividend yield for Portman’s stocktoday?

10.08%

11.45%

10.40%

8.32%

Now let’s apply the results of your calculations to thefollowing situation:

Portman has 1,000,000 shares outstanding, and Judy Davis, aninvestor, holds 15,000 shares at the current price (computedabove). Suppose Portman is considering issuing 125,000 new sharesat a price of $18.20 per share. If the new shares are sold tooutside investors, by how much will Judy’s investment in PortmanIndustries be diluted on a per-share basis?

$0.44 per share

$0.36 per share

$0.31 per share

$0.76 per share

Thus, Judy’s investment will be diluted, and Judy willexperience a total   of   .