Question

Holt Enterprises recently paid a dividend, D0, of $3.00. It expects to have nonconstant growth of 18% for 2 years followed by a constant rate of 4% thereafter. The firm's required return is 15%. How far away is the horizon 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. The terminal, or horizon, date is infinity since common stocks do not have a maturity date. 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. $

Answer 1

Answer to A - IV

Now let us analyse the options

Terminal or Horizon date is when the dividends grow at a constant rate, which is at the end of year 2. that the terminal or Continuing value can be determined using the formula D/(Re-G), where D -Dividend, Re- Return on Equity and G - Constant Growth Rate. It is clearly mentioned that for the two years the dividend is expected to grow at a non constant rate of 18% and thereafter it is expected to grow at a contant growth rate. Therefore option I, II and III are incorrect.

I -Wrongly mentions the horizon value as year 0

II - Wrongly mentions that the horizon date is the date when dividends become non Constant

III - Wrongly mentions that the horizon date is at the begining of year 2

Answer to B

Given that D0 = $3

Now, Therefore Dividend at the end of year 1 = $3 * 1.18 = $ 3.54

Dividend at the end of Year 2 = $ 3.54 * 1.18 = $ 4.1772

Dividend at the end of Year 3 = $ 4.1772 * 1.04 = $ 4.344288

Now, Terminal Value = D3/ (Re-G), Where D3 = $ 4.344288, Re - 15%, and G = 4%.

Now Terminal Value at the end of year 2 = $ 4.344288/(0.15-.04)

Therefore Terminal Value = $ 39.4935

Answer to C

Now value of a common stock is the present value of all future expected dividends and the ternminal value.

We need to now compute the Present values of the above Computed Cash Flows=

Intrinsic Value = D1/(1+ RE) + D2/(1+ RE)^2 + Terminal Value/(1+ RE)^2

Now,

Intrinsic Value = . 3.54/ (1+0.16) + 4.1772/ (1+0.16) ^2 + 39.4935/ (1+0.16) ^2

Intrinsic Value = $ 35.51