Question

14. Henry Inc. recently paid a dividend, Do, of $3. It expects to have nonconstant growth of 20% for 3 years followed by a constant rate of 6% thereafter. The firm's required rate of return is 11% a. How far away is the horizon date? b. What is the firm's horizon value? c. What is the firm's intrinsic value today, Po?

Answer 1

a. The horizon date will be the date when the growth rate becomes constant which in the given question is at the end of 3 years.

b. The value is computed as shown below:

= [ Dividend in year 4 / (required rate of return - growth rate)

= [ ($ 3 x 1.20³ x 1.06) / (0.11 - 0.06) ]

= $ 109.9008

c. The value is computed as shown below:

= Dividend in year 1 / ( 1 + required rate of return)¹ + Dividend in year 2 / ( 1 + required rate of return)² + Dividend in year 3 / ( 1 + required rate of return)³ + 1 / ( 1 + required rate of return)³ [ ( Dividend in year 4 / ( required rate of return - growth rate) ]

= ($ 3 x 1.20) / 1.11 + ($ 3 x 1.20²) / 1.11² + ($ 3 x 1.20³) / 1.11³ + 1 / 1.11³ x [ ($ 3 x 1.20³ x 1.06) / (0.11 - 0.06) ]

= $ 3.6 / 1.11 + $ 4.32 / 1.11² + $ 5.184 / 1.11³ + 1 / 1.11³ x [ ($ 109.9008) ]

= $ 3.6 / 1.11 + $ 4.32 / 1.11² + $ 115.0848 / 1.11³

= $ 90.90 Approximately

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