Hart Enterprises recently paid a dividend, D 0 , of $1.50. It expects to have no
ID: 2714586 • Letter: H
Question
Hart Enterprises recently paid a dividend, D0, of $1.50. It expects to have nonconstant growth of 18% for 2 years followed by a constant rate of 4% thereafter. The firm's required return is 15%.
How far away is the horizon date?
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
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.
The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
What is the firm's horizon, or continuing, value? Round your answer to two decimal places.
What is the firm's intrinsic value today, P0? Round your answer to two decimal places.
Explanation / Answer
How far away is the horizon date?
Answer: The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
What is the firm's horizon, or continuing, value? Round your answer to two decimal places.
Answer:D0=$1.50
D1=1.50*1.18=1.77
D2=1.77*1.18=2.0886
D3=2.0886*1.04=2.172144
Firm horizon value=2.172144/0.15-0.04
=19.75
What is the firm's intrinsic value today, P0? Round your answer to two decimal places.
Answer:The firm’s intrinsic value is calculated as the sum of the present value of all dividends during the supernormal growth period plus the present value of the terminal value. Using your financial calculator, enter the following inputs: CF0 = 0, CF1 = 1.77, CF2 = 2.0886 + 19.75 = 21.8386, I/YR = 15, and then solve for
NPV = 1.539+16.513=18.052
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