In: Finance
Holt Enterprises recently paid a dividend, D0, of $3.50. It expects to have nonconstant growth of 21% for 2 years followed by a constant rate of 4% thereafter. The firm's required return is 14%.
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Answer a.
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
Answer b.
Last Dividend, D0 = $3.50
Growth rate for next 2 years is 21% and a constant growth rate (g) of 4% thereafter
D1 = $3.5000 * 1.21 = $4.2350
D2 = $4.2350 * 1.21 = $5.12435
D3 = $5.12435 * 1.04 = $5.329324
Required Return, rs = 14%
Horizon Value, P2 = D3 / (rs - g)
Horizon Value, P2 = $5.329324 / (0.14 - 0.04)
Horizon Value, P2 = $5.329324 / 0.10
Horizon Value, P2 = $53.29
Answer c.
Intrinsic Value, P0 = $4.235/1.14 + $5.12435/1.14^2 +
$53.29/1.14^2
Intrinsic Value, P0 = $48.66