Holt Enterprises recently paid a dividend, D0, of $3.75. It expects to have nonconstant growth of 24% for 2 years followed by a constant rate of 3% thereafter. The firm's required return is 9%.
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a)
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
b)
Year 1 dividend = 3.75 (1 + 24%) = 4.65
Year 2 dividend = 4.65 (1 + 24%) = 5.766
Year 3 dividend = 5.766 (1 + 3%) = 5.93898
Horizon value = D3 / required rate - growth rate
Horizon value = 5.93898 / 0.09 - 0.03
Horizon value = 5.93898 / 0.06
Horizon value = $98.98
c)
Inrinsic value = 4.65 / (1 + 0.09)^1 + 5.766 / (1 + 0.09)^2 + 98.98 / (1 + 0.09)^2
Inrinsic value = $92.43
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