Question

Holt Enterprises recently paid a dividend, D_{0}, of
$2.00. It expects to have nonconstant growth of 22% for 2 years
followed by a constant rate of 3% thereafter. The firm's required
return is 17%.

- How far away is the horizon date?
- The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
- The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
- The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
- The terminal, or horizon, date is Year 0 since the value of a common stock is the present value of all future expected dividends at time zero.
- The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.

-Select-IIIIIIIVVItem 1 - What is the firm's horizon, or continuing, value? Do not round
intermediate calculations. Round your answer to the nearest cent.
$

- What is the firm's intrinsic value today, ? Do not round
intermediate calculations. Round your answer to the nearest cent.
$

Answer #1

Dividend just paid (D0) = $2.00

Growth rate for 2 years(g) = 22%

Growth rate thereafter(g1) = 3%

Required rate of Return(Ke) = 17%

D1 = D0(1+g) =$2.00(1+0.22)

= $2.44

D2 = D1(1+g) = $2.44*(1+0.22)

= $2.9768

a). Horizon date is the date when the Growth rate becomes Constant. It occurs at the end of year 2.

Hence, option II

b). Calculating the Firm's Horizon value:-

So,
**Horizon Value is $21.90**

b). Calculating the Firm's Intrinsic Value:-

Price = $2.085 + $2.175 + $15.998

Price = $20.26

So,
**Firm's intrinsic Value = $20.26**

If you need any clarification, you can ask in comments.

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