NONCONSTANT GROWTH VALUATION Holt Enterprises recently paid a dividend, Do, of $
ID: 2620129 • Letter: N
Question
NONCONSTANT GROWTH VALUATION Holt Enterprises recently paid a dividend, Do, of $3.75. It expects to have nonconstant growth of 25% for 2 years followed by a constant rate of 3% thereafter. The firms required return is 15%. a. How far away is the horizon date? O 0 L.The terminal, or horizon, date is infinity since common stocks do not have a maturity date The terminal, or horizon, date is Year O since the value of a common stock is the present value of all future expected dividends at time zero. III. The terminal, or horizon, date is the date when the growth rate becomes IV. The terminal, or horizon, date is the date when the growth rate becomes constant O V.The terminal, or horizon, date is the date when the growth rate becomes constant nonconstant. This occurs at time zero. 19 This occurs at the beginning of Year 2 20. 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. 50.29 c. What is the firm's intrinsic value today, Po? Round your answer to two decimal places Do not round your intermediate calculations 41.58 Partially Correct ? F3Explanation / Answer
a.The horizon date would be end of year 2 when growth rate becomes constant at 3%.
b.
D1=(3.75*1.25)=$4.6875
D2=(4.6875*1.25)=$5.859375
Value after year 2=(D2*Growth rate)/(Required return-Growth rate)
=(5.859375*1.03)/(0.15-0.03)
=$50.29296875
Hence continuing value=$50.29(Approx).
c.
Intrinsic value today=Future dividends*Present value of discounting factor(15%,time period)
=$4.6875/1.15+$5.859375/1.15^2+$50.29296875/1.15^2
$46.54(Approx).
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