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Holt Enterprises recently paid a dividend, D0, of $3.25. It expects to have nonconstant growth of...

Holt Enterprises recently paid a dividend, D0, of $3.25. It expects to have nonconstant growth of 17% for 2 years followed by a constant rate of 10% thereafter. The firm's required return is 12%. How far away is the horizon date? The terminal, or horizon, date is infinity since common stocks do not have a maturity 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. 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, ? Do not round intermediate calculations. Round your answer to the nearest cent

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Expert Solution

Question 1:

How far away is the horizon date?

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

Question 2:

D0 = Current Dividend = $3.25

g1 = grwoth rate = 17%

g2 = growth rate = 10%

r = required rate = 12%

D1 = Dividend in Year 1 = D0 * (1+g1) = $3.25 * (1+17%) = $3.8025

D2 = Dividend in Year 2 = D1 * (1+g1) = $3.8025 * (1+17%) = $4.448925

D3 = Dividend in Year 3 = D2 * (1+g2) = $4.448925 * (1+10%) = $4.8938175

Horizon Value = D3 / (r - g2) = $4.8938175 / (12%-10%) = $244.690875

Therefore, Horizon or Continuing value is $244.69

Question 3:

Firm's Intrinsic Value = [D1/ (1+r)^1] + [D2 / (1+r)^2] + [Horizon Value / (1+r)^2]

= [$3.8025 / (1+12%)^2] + [$4.448925 / (1+12%)^2] + [$244.690875 / (1+12%)^2]

= [$3.8025 / 1.12] + [$4.448925 / 1.2544] + [$244.690875 / 1.2544]

= $3.395089286 + $3.546655772 + $195.0660674

= $202.0078125

Therefore, Firm's Intrinsic Value of stock today is $202.01

jeff jeffy answered 2 years ago
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