In: Finance
Holt Enterprises recently paid a dividend, D0, of $1.00. It expects to have nonconstant growth of 13% for 2 years followed by a constant rate of 4% thereafter. The firm's required return is 8%.
(a)- (IV)-The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
(b)-Firm’s Horizon or Continuing Value
Dividend in Year 0 (D0) = $1.00 per share
Dividend in Year 1 (D1) = $1.1300 per share [$1.00 x 113%]
Dividend in Year 2 (D2) = $1.2769 per share [$1.1300 x 113%]
Dividend Growth Rate (g) = 4.00% per year
Required Rate of Return (Ke) = 8.00%
Therefore, the Firms Horizon or Continuing Value = D2(1 + g) / (Ke – g)
= $1.2769(1 + 0.04) / (0.08 – 0.04)
= $1.3280 / 0.04
= $33.20 per share
“Hence, the Firm’s Horizon or Continuing Value will be $33.20”
(c)-Firms Intrinsic Value Today
Firms Intrinsic Value Today is the Present Value of the future dividend payments plus the present value of Firm’s Horizon or Continuing Value
Year |
Cash flow ($) |
Present Value Factor (PVF) at 8.00% |
Present Value of cash flows ($) [Cash flows x PVF] |
1 |
1.1300 |
0.92593 |
1.05 |
2 |
1.2769 |
0.85734 |
1.09 |
2 |
33.20 |
0.85734 |
28.46 |
TOTAL |
30.60 |
||
“Hence, the Firms Intrinsic Value Today will be $30.60”
NOTE
The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.