Question

Holt Enterprises recently paid a dividend, D_{0}, of
$2.25. It expects to have nonconstant growth of 20% for 2 years
followed by a constant rate of 9% thereafter. The firm's required
return is 15%.

- 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) = $2.25

Growth rate for 2 years(g) = 20%

Growth rate thereafter(g1) = 9%

Required rate of Return(Ke) = 15%

D1 = D0(1+g) =$2.25(1+0.20)

= $2.70

D2 = D1(1+g) = $2.70*(1+0.20)

= $3.24

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 $58.86**

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

Price = $2.3478 + $2.4499 + $44.5066

Price = $49.30

So,
**Firm's intrinsic Value = $49.30**

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