Holt Enterprises recently paid a dividend Do of 200 It expec

Holt Enterprises recently paid a dividend, Do, of $2.00. It expects to have nonconstant growth of 12% for 2 years followed by a constant rate of 6% thereafter. The firm\'s required return is 17%. a. How far away is the horizon date? I. The terminal, or horizon, date is infinity since common stocks do not have a maturity date. II. 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. III. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs IV, The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at V. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at at time zero. the beginning of Year 2. the end of Year 2. -Select- b. What is the firm\'s horizon, or continuing, value? Round your iswer to two decimal places. Do not round your intermediate calculations. c. What is the firm\'s intrinsic value today, Po? Round your answer to two decimal places. Do not round your intermediate calculations

Solution

a)

The terminal, or horizon, date is the date when the grwoth rate becomes constant. This occures at end of year 2

b)

Year 1 dividend = 2 * 1.12 = 2.24

year 2 dividend = 2.24 * 1.12 = 2.5088

Year 3 dividend = 2.5088 * 1.06 = 2.659328

Horizon value = D1 / K - G

Horizon value = 2.659328 / 0.17 - 0.06

Horizon value = 2.659328 / 0.11

Horizon value = $24.17571

c)

Present value of 24.17571 = 24.17571 / ( 1 + 0.17)²

Present value = 17.660684

Present value of year 2 dividend = 2.5088 / ( 1 + 0.17)²

Present value of year 2 dividend = 1.832712

Present value of year 1 dividend = 2.24 / ( 1 + 0.17)

Present value of year 1 dividend = 1.91453

Firm\'s intrinsic value = 1.91453 + 1.832712 + 17.660684

Firm\'s intrinsic value = $21.408