Question

Holt Enterprises recently paid a dividend, D0, of $1.50. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 8% thereafter. The firm's required return is 17%. 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. 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. -Select-IIIIIIIVVItem 1 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. $   __________________ Earley Corporation issued perpetual preferred stock with a 10% annual dividend. The stock currently yields 7%, and its par value is $100. Round your answers to the nearest cent. What is the stock's value? $   Suppose interest rates rise and pull the preferred stock's yield up to 15%. What is its new market value? $

Answer 1

Question a:

Option I is correct

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

Question b:

D0 = Current Dividend = $1.50

g1 = growth rate = 20%

g2 = growth rate = 8%

r = required return = 17%

D1 = Dividend in Year 1 = D0 * (1+g1) = $1.50 * (1+20%) = $1.8

D2 = Dividend in Year 2 = D1 * (1+g1) = $1.80 * (1+20%) = $2.16

D3 = Dividend in Year 3 = D2 * (1+g2) = $2.16 * (1+8%) = $2.3328

Horizon Value = D3/ (r - g2)

= $2.3328 / (17% - 8%)

= $25.92

Horizon or Continuing value is $25.92

Question c:

Intrinsic value of stock today = [D1 / (1+r)^1] + [D2 / (1+r)^2] + [Horizon Value / (1+r)^2]

= [$1.80 / (1+17%)^1] + [$2.16 / (1+17%)^2] + [$25.92 / (1+17%)^2]

= [$1.80 / 1.17] + [$2.16 / 1.3689] + [$25.92 / 1.3689]

= $1.53846154 + $1.57790927 + $18.9349112

= $22.051282

Therefore, Firm's Intrinsic value today is $22.05

Question a:

D = Annual Dividend = $100 * 10% = $10

r = yeild rate = 7%

Stock's Value = D/r

= $10 / 7%

= $142.857143

Therefore, Stock's value is $142.86

Question b:

D = Annual Dividend = $100 * 10% = $10

r = yeild rate = 15%

Stock's Value = D/r

= $10 / 15%

= $66.6666666667

Therefore, Stock's value is $66.67