Holt Enterprises recently paid a dividend, D0, of $2.50. It expects to have nonconstant growth of 15% for 2 years followed by a constant rate of 6% thereafter. The firm's required return is 14%.
a.
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
b.
Horizon Value = 2.50(1.15)2(1.06)/(0.14 - 0.06)
Horizon Value = $43.81
c.
Intrinsic Value = 2.50(1.15)/(1.14) + (2.50(1.15)2 + 43.81)/(1.14)2
Intrinsic Value = $38.77
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