Check My Work (1 remaining) Holt Enterprises recently paid a dividend, DO, of $1

Question

Check My Work (1 remaining) Holt Enterprises recently paid a dividend, DO, of $1.25. It expects to have nt growth of 21% for 2 years followed by a constant rate of 8% thereafter. The firm's s constant. This occurs at the end of Year 2 1. The terminal, or horizon, date is the I. The terminal, or horizon, date is infinity since common stocks do not have a maturity date. III. The terminal, or horizon, date is Year 0 since the value of a common TV. The terminal, or horizon, date is the date when the growth rate V. The terminal, or horizon, date is the date when the growth rate becomes constant. This nonconstant. This occurs at time zero. occurs at the beginning of Year 2 Do not round your i Check My Work (a remaining) 21

Explanation / Answer

Part 1)

The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2. (which is Option A) [the answer is self-explanatory in nature]

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Part 2)

The horizon or terminal value is determined as below:

Horizon or Terminal Value = D2*(1+Growth Rate from Year 2 Onwards)/(Required Return - Growth Rate for Year 2 Onwards)

Here, D2 = 1.25*(1+21%)^2, Growth Rate from Year 2 and Required Return = 18%

Using these values in the above formula, we get,

Horizon or Terminal Value = 1.25*(1+21%)^2*(1+8%)/(18%-8%) = $19.77

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Part 3)

The intrinsic value is calculated as follows:

Intrinsic Value (P0) = D1/(1+Required Return)^1 + D2/(1+Required Return)^2 + Terminal Value/(1+Required Return)^2

Here D1 = 1.25*(1+21%), D2 = 1.25*(1+21%)^2, Terminal Value = $19.77 and Required Return = 18%

Using these values in the above formula, we get,

Intrinsic Value (P0) = 1.25*(1+21%)/(1+18%)^1 + 1.25*(1+21%)^2/(1+18%)^2 + 19.77/(1+18%)^2 = $16.79

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