Question

m ap Cengage Learning 12481 Youtube CENGAGE | MINDTAP Q Search 09: Pre-Assessment - Stocks and Their Valuation attempts: Average: 71 2. Problem 9.04 (Nonconstant Growth Valuation) Book Problem Walk Through Hort Enterprises recently paid a dividend, Do. of $4.00. It expects to have nonconstant growth of 12% for 2 years followed by a constant rate of ow thereafter. The firm's required return is a. How far away is the horizon date? 1. The terminal, or hortion date is the date when the growth rate becomes no constant. This occurs at time zero II. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2 II. 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 V. 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 b. What is the firm's horizon, or continuing, value? Do not round Intermediate calculations. Round your answer to the nearest cent. ? Do not round intermediate calculations. Round your answer to the near Save Cand Continue without saving

Answer 1

(a)- (III)-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) = $4.00 per share

Dividend in Year 1 (D1) = $4.4800 per share [$4.00 x 112%]

Dividend in Year 2 (D2) = $5.0176 per share [$4.4800 x 112%]

Dividend Growth Rate (g) = 8.00% per year

Required Rate of Return (Ke) = 17.00%

Therefore, the Firms Horizon or Continuing Value = D2(1 + g) / (Ke – g)

= $5.0176(1 + 0.08) / (0.17 – 0.08)

= $5.4190 / 0.09

= $60.21 per share

“Hence, the Firm’s Horizon or Continuing Value will be $60.21”

(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 ($)	Present Value Factor (PVF) at 17.00%	Present Value of cash flows ($) [Cash flows x PVF]
1	4.4800	0.854701	3.83
2	5.0176	0.730514	3.67
2	60.21	0.730514	43.99
TOTAL	51.48

“Hence, the Firms Intrinsic Value Today will be $51.48”

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.