Question

Nonconstant growth valuation

Holt Enterprises recently paid a dividend, D0, of $2.75. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 3% thereafter. The firm's required return is 14%.

a. How far away is the horizon date?

I. 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.

II. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.

III. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.

IV. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.

V. The terminal, or horizon, date is infinity since common stocks do not have a maturity date.

b. What is the firm's horizon, or continuing, value? Round your answer to two decimal places. Do not round your intermediate calculations. $

c. What is the firm's intrinsic value today, P0? Round your answer to two decimal places. Do not round your intermediate calculations. $

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.

	Required rate=	14.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	2.75	20.00%	3.3		3.3	1.14	2.8947
2	3.3	20.00%	3.96	b. 37.08	41.04	1.2996	31.57895
	Long term growth rate (given)=	3.00%			Value of Stock =	Sum of discounted value =	c.34.47

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor