Holt Enterprises recently paid a dividend, D0, of $3.00. It expects to have nonconstant growth of 15% for 2 years followed by a constant rate of 7% thereafter. The firm's required return is 12%.
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 * 1.15 = 3.45
Year 2 dividend = 3.45 * 1.15 = 3.9675
Year 3 dividend = 3.9675 * 1.07 = 4.24523
Horizon value = D3 / required rate - growth rate
Horizon value = 4.24523 / 0.12 - 0.07
Horizon value = 4.24523 / 0.05
Horizon value = $84.90
c)
Intrinsic value = 3.45 / (1 + 0.12)1 + 3.9675 / (1 + 0.12)2 + 84.9 / (1 + 0.12)2
Intrinsic value = $73.92
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