Question

NONCONSTANT GROWTH VALUATION

Holt Enterprises recently paid a dividend, D₀, of $4.00. It expects to have nonconstant growth of 12% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 11%.

1. How far away is the horizon date?
   -Select-IIIIIIIVVItem 1
   

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

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

3. 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.

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

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

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

3. What is the firm's intrinsic value today,P̂₀? Round your answer to two decimal places. Do not round your intermediate calculations.
   
   

Answer 1

- Dividend just paid (D0) = $4

Non-constant Growth rate for 2 years(g) = 12%

Constant Growth rate thereafter(g1) = 5%

Required rate of Return(Ke) = 11%

D1 = D0(1+g) =$4(1+0.12)

= $4.48

D2 = D1(1+g) = $4.48*(1+0.12)

= $5.0176

a). Horizon date is the date when the Growth rate becomes Constant. It occurs at the end of year 2.

Hence, option I

b). Calculating the Firm's Horizon value:-

HV = $87.808

So, Horizon Value is $87.80

b). Calculating the Firm's Intrinsic Value today:-

Price = $4.0360 + $4.0724 + $71.267

Price = $79.38

So, Firm's intrinsic Value = $79.38