The options for the three boxes in order are Box1 A Take ove

The options for the three boxes in order are:

Box1: A: Take over, B: Founders share, C: Preemptive right D: Bond Indenture E: Proxy

Box2: A: 52,000 shares B: 56,000 shares C: 40,000 shares, D: 48,000 Shares E: 44,000 Shares

Box3: A: $2,590,400 B: $2,644,000, C: $2,700,000 D: $2,490,800 E: $2,539,600

Portman Industries just paid a dividend of $2.00 per share. Portman expects the coming year to be very good, and its dividend is expected to grow by 15% over the year. After the next year, though, Portman\'s dividend is expected to grow at a constant rate of 6.0% per year. The risk-free rate (RF) is 6% and the market risk premium (RPM) is 4% If Portman\'s beta is 1.1, what is the current intrinsic value of the firm\'s stock? Assume the market is in equilibrium. O $54.76 O $57.50 O $56.10 O $52.27 O $53.49 Portman has 500,000 shares outstanding and Judy Davis, an investor, holds 40,000 shares. Suppose Portman is considering issuing 100,000 new shares at a price of $50 per share. If the new shares are sold to outside investors, how much will Judy\'s investment in Portman be diluted on a per-share basis? O $1.25 O $0.80 O $0.58 O $0.38 O $1.01 Judy could be protected by dilution if the corporate charter contains a exercised that provision and avoided dilution, she would hold the new stock issue provision. If Judy fully | worth | after

Solution

PART A

The intrinsic value of a share is the sum of the present value of all dividends

Present dividend is $2 and it grows by 15% next year i.e. 2(1+15%) = $2.3

After this the dividends rise by 6% perpetually so there are two parts of the intrinsic value i.e. a 2.3 dividend next year and perpetuity thereafter

IV= 2.3/(1+R) +TV/(1+R)

where

R is the return n equity found using CAPM

TV is the terminal value

Return on equity

Re=Rf+ beta (Rm-Rf)

Re=6%+1.1 x 4% = 10.4%

Finding terminal value TV

TV= 2.3 (1+6%)/(10.4%-6%) = $55.41

Substituting the values

IV= 2.3/(1+10.4%)+55.41/(1+10.4%) = $52.27............Intrinsic value of share

PART 2

If new shares are issued at $50 and old shares are priced at $52.27 then the final price of share will be weighted average of the shares

SP= (50 x 100,000+500,000 x 52.27)/(600,000) = $51.89

This is the new equilibrium price at which share price will settle so the dilution per share basis is 52.27-51.89 i.e $0.38

PART 3

If Judy has preemptive rights she will have the right to buy proportional number of shares in the new offering to maintain her ownership percentage.

Right now she owns 40,000/500,000 = 8% of the company and thus should be able t obuy 8% of 100,000 shares i.e. 8000 shares more

Now she will own 48,000 shares and the total worth will be 48000 x 51.89 = $2,490,800