Constant growth valuation Harrison Clothiers\' stock currently sells for $31 a s

Question

Constant growth valuation

Harrison Clothiers' stock currently sells for $31 a share. It just paid a dividend of $1.5 a share (that is, D0 = 1.5). The dividend is expected to grow at a constant rate of 4% a year.

What stock price is expected 1 year from now? Round your answer to two decimal places.

What is the required rate of return? Round your answers to two decimal places.

Nonconstant growth valuation

Hart Enterprises recently paid a dividend, D0, of $2.75. It expects to have nonconstant growth of 13% for 2 years followed by a constant rate of 6% thereafter. The firm's required return is 17%.

What is the firm's horizon, or continuing, value? Round your answer to two decimal places.

What is the firm's intrinsic value today, Round your answer to two decimal places.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Stock Price 1 Year from Now = Current Price*(1+Growth Rate) = 31*(1+4%) = $32.24

Required Return = D1/Current Stock Price + Growth Rate = 1.5*(1+4%)/31 + 4% = 9.03%

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Part B:

Horizon Value = 2.75*(1+13%)^2*(1+.06)/(.17 - .06)*(1+.17)^2 = $24.72

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Intrinsic Value = 2.75*(1+.13)^1/(1+.17)^1 + 2.75*(1+.13)^2/(1+.17)^2 + 2.75*(1+13%)^2*(1+.06)/(.17 - .06)*(1+.17)^2 = $29.94

Thanks.

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