Holt Enterprises recently paid a dividend, D0, 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%.
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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
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