Question

Holt Enterprises recently paid a dividend, D₀, of $1.50. It expects to have nonconstant growth of 15% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 16%.

1. How far away is the horizon date?
   1. 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.
   2. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.
   3. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
   4. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
   5. The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
   
   -Select-
   
2. What is the firm's horizon, or continuing, value? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

3. What is the firm's intrinsic value today, ? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

Answer 1

a. IV. Horizon Date is when the growth rate becomes constant i.e. at the end of Year 2

b.Horizon value = Dividend in year 3/(Required return - Growth rate)

= 1.50(1.15)^2(1.05)/(16%-5%)

= $18.9358

i.e. $18.94 per share

C.Value today is equal to the present value of all future inflows

= 1.50(1.15)/(1.16) + 1.50*(1.15)^2/(1.16)^2 + 18.94/(1.16)^2

= $17.04 per share