Holt Enterprises recently paid a dividend, D0, of $1.00. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 10% thereafter. The firm's required return is 20%.
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- Dividend just paid (D0) = $1.00
Growth rate for 2 years(g) = 20%
Growth rate thereafter(g1) = 10%
Required rate of Return(Ke) = 20%
= $1.20
= $1.44
a). Horizon date is the date when the Growth rate becomes Constant. It occurs at the end of year 2.
Hence, Option 4
b). Calculating the Firm's Horizon value:-
So, Horizon Value is $15.84
b). Calculating the Firm's Intrinsic Value:-
Price = $1.00 + $1.00 + $11
Price = $13
So, Firm's intrinsic Value = $13
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Price D1 (1 + ke) + D2 (1+ke) + HV (1 + ke 2
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