Question

Holt Enterprises recently paid a dividend, D0, of $2.00. It expects to have nonconstant growth of 23% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 10%.

a. How far away is the horizon date?

I. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.

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

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

IV. The terminal, or horizon, date is infinity since common stocks do not have a maturity date.

V. 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.

a.) Select: I, II, III, IV, V

b.) What is the firm's horizon, or continuing, value? Round your answer to two decimal places. Do not round your intermediate calculations.
$______

c.) What is the firm's intrinsic value today, P?0? Round your answer to two decimal places. Do not round your intermediate calculations. $_____

Answer 1

a)	The Terminal horizon is the date hen growth rate becomes constant. This occurs at the end of Year 2
	So the answer is option (3)
b)	Firm's Horizon or Terminal value is :
	Years	growth	dividend	pv@10%
	0	23%	2	0
	1	23%	2.46	2.236364
	2	5%	2.583	2.134711
	3	5%	2.71215
	The firms Horizon or Terminal value at he Horizon date of alldividends expected thereafter
	In this problem it is calculated as follows:
		=	2.583(1.05)/.10 - .05
		=	54.243
c)	The Firms intrinsic value todayis calculated as the sum of the present value of all dividendsduring the
	supernormal growth period and the present value of the terminal value.
	=	CF0 + CF1 + CF2 + NPV OF HORIZON VALUE
	=	0+2.24 +2.13 +54.243/(1.1)^2
	=	49.2