Hart Enterprises recently paid a dividend D0 of 125 It expec

Hart Enterprises recently paid a dividend, D0, of $1.25. It expects to have non-constant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm\'s required return is 8%. What is the firm\'s horizon, or continuing, value? Round your answer to two decimal places. What is the firm\'s intrinsic value today?

Solution

Current dividend= $1.25

Dividend in Year 1= 1.20*1.25= $1.50

Divdend in year 2 = (1.20)^2*1.25= $1.80

Continuing Value = Dividend in year 2 *(1+growth rate in Year 3)/(Required rate of retun - constant growth rate)

= (1.80*(1.05))/(0.08-0.05) = $63.00

Firms Instrinsic value = Present value of high growth phase + Presesnt value of terminal value or continuing value

= D1/(1+r)+D2/(1+r)^2+ Terminal value/(1+r)^2

=1.5/(1.08+1.8/(1.08)^2+63/(1.08)^2

=$56.94