Question

eBook

Holt Enterprises recently paid a dividend, D₀, of $1.25. It expects to have nonconstant growth of 22% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 14%.

1. How far away is the horizon date?
   1. 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.
   2. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.
   3. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
   4. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
   5. The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
   
   -Select-IIIIIIIVVItem 1
   
2. What is the firm's horizon, or continuing, value? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

3. 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) = $1.25

Growth rate for 2 years(g) = 22%

Growth rate thereafter(g1) = 5%

Required rate of Return(Ke) = 14%

D1 = D0(1+g) =$1.25(1+0.22)

= $1.525

D2 = D1(1+g) = $1.525*(1+0.22)

= $1.8605

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

Hence, option IV

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

HV = $21.7058

So, Horizon Value is $21.71

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

Price = $1.3377 + $1.4316 + $16.7019

Price = $19.47

So, Firm's intrinsic Value = $19.47

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

​​​​​​​If you like my answer, then please up-vote as it will be motivating