4 )
Holt Enterprises recently paid a dividend, D0, of $1.25. It expects to have nonconstant growth of 21% for 2 years followed by a constant rate of 6% thereafter. The firm's required return is 15%.
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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 = 1.25 * 1.21 = 1.5125
Year 2 dividend = 1.5125 * 1.21 = 1.83013
Year 3 dividend = 1.83013 * 1.06 = 1.93993
Horizon value = D3 / required rate - growth rate
Horizon value = 1.93993 / 0.15 - 0.06
Horizon value = 1.93993 / 0.09
Horizon value = $21.55
c)
Intrinsic value = 1.5125 / (1 + 0.15)1 + 1.83013 / (1 + 0.15)2 + 21.55 / (1 + 0.15)2
Intrinsic value = $18.99
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