Question

Holt Enterprises recently paid a dividend, D0, of $3.75. It expects to have nonconstant growth of 23% for 2 years followed by a constant rate of 6% thereafter. The firm's required return is 9%.
a. How far away is the horizon date?

I. 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.

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

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

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

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

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, P0? Round your answer to two decimal places. Do not round your intermediate calculations.

Answer 1

Answer:

a. How far away is the horizon date?

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

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

to determine the horizon value we can use the Gordon growth formula:

stock price = future dividend / (required rate of return - constant growth rate)

Div₀ = $3.75

Div₁ = $4.6125

Div₂ = $5.673375

Div₃ = $6.97825125

since the terminal value is calculated for year 2, we must use Div₃ in our calculations:

stock price = $6.97825125 / (9% - 6%) = $232.61

c. What is the firm's intrinsic value today, P0? Round your answer to two decimal places. Do not round your intermediate calculations.

we have to calculate the present value of:

P₀ = $4.6125/1.09 + $5.673375/1.09² + $232.608375/1.09² = $4.2317 + $4.7752 + $195.7818 = $204.7887 ≈ $204.79