Question

Click here to read the eBook: Valuing Nonconstant Growth Stocks NONCONSTANT GROWTH VALUATION Holt Enterprises recently paid a dividend, Do, of $3.00. It expects to have no constant growth of 15% for 2 years followed by a constant rate of 4% thereafter. The firm's required return is 12% a. How far away is the horizon date? 1. The terminal, or horizon, date is Year since the value of a common stock is the present value of all future expected dividends at time zero. 11. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero m. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2 IV. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2 V. The terminal, or horror, date is Infinity since common stocks do not have a maturity date. b. What is the firm's harron, or continuing, value Round your answer to two decimal places. Do not round your intermediate calculations. c. What is the firm's intrinek value today, Po? Round your answer to two decimal places. Do not round your intermediate calculations Grade New S ave Can DO150. 19 WA0 ? w ? MacBook Air

can someone help me with growth valuation? Please show all work so I know how to correctly answer other examples. I am also using a BA 2 Plus business analyst calculator, thanks!

Answer 1

a). Horizon Date is the time when the growth rate becomes constant, which is the end of 2nd year in this case.

So, Statement "IV" is correct.

b). D1 = D0 * (1 + g1) = $3 * (1 + 0.15) = $3.45

D2 = D1 * (1 + g1) = $3.45 * (1 + 0.15) = $3.9675

D3 = D2 * (1 + gC) = $3.9675 * (1 + 0.04) = $4.1262

Horizon Value(P2) = D3 / [r - g] = $4.1262 / [0.12 - 0.04] = $4.1262 / 0.08 = $51.58

c). P0 = [D1 / (1 + r)] + [(D2 + P2) / (1 + r)²]

= [$3.45 / (1 + 0.12)] + [($3.9675 + $51.58) / (1 + 0.12)²]

= $3.08 + $44.28 = $47.36