Question

Holt Enterprises recently paid a dividend, D_{0}, 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%.

- How far away is the horizon 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.
- 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.

-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, ^p0 ? Do
not round intermediate calculations. Round your answer to the
nearest cent.
$

Answer #1

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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