Holt Enterprises recently paid a dividend, D0, of $1.75. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 6% thereafter. The firm's required return is 15%.
(a)- (V)-The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
(b)-Firm’s Horizon or Continuing Value
Dividend in Year 0 (D0) = $1.75 per share
Dividend in Year 1 (D1) = $2.1000 per share [$1.75 x 120%]
Dividend in Year 2 (D2) = $2.5200 per share [$2.1000 x 120%]
Dividend Growth Rate (g) = 6.00% per eyar
Required Rate of Return (Ke) = 15.00%
Therefore, the Firms Horizon or Continuing Value = D2(1 + g) / (Ke – g)
= $2.5200(1 + 0.06) / (0.15 – 0.06)
= $2.6712 / 0.09
= $29.68 per share
“Hence, the Firm’s Horizon or Continuing Value will be $29.68”
(c)-Firms Intrinsic Value Today
Firms Intrinsic Value Today is the Present Value of the future dividend payments plus the present value of Firm’s Horizon or Continuing Value
|
Year |
Cash flow ($) |
Present Value factor at 15.00% |
Stock price ($) |
|
1 |
2.1000 |
0.86957 |
1.82 |
|
2 |
2.5200 |
0.75614 |
1.91 |
|
2 |
29.68 |
0.75614 |
22.44 |
|
TOTAL |
26.17 |
||
“Hence, the Firms Intrinsic Value Today will be $26.17”
NOTE
The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.
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