Che 10. Click here to read the eBook: Valuing Nonconstant Growth Stocks NONCONST
ID: 2780213 • Letter: C
Question
Che 10. Click here to read the eBook: Valuing Nonconstant Growth Stocks NONCONSTANT GROWTH VALUATION Holt Enterprises recently paid a dividend Do, of S2.75. It expects to have nonconstant growth of 25% for 2 years followed by a constant rate of 8% thereafter. The firm's required return is 1 a. How far away is the horizon date? 12. 13. 14 O 15.III. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2. 16. e 189 L. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. 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 IV. The terminal, or horizon, date is infinity since common stocks do not have a maturity date. V. The terminal, or horizon, date is Year 0 since the value of a common stock is the present value of all future expected dividends at time zero. 18. o O b. What is the firm's honzon, or continuing, value? ound our answer to two t ec mal pace Do not round our intermediate ce tor 20 s 46.44 c What is the firm's intrinsic value today, P o? Round your answer to two decimal places. Do not round your intermediate calculations. Hide Feedback Partially CorrectExplanation / Answer
1. Since the non constant growth rate is till year 2, horizon value is the value of the future payment at year 2.
Option III.
2.
D0 = 2.75
D1 = 2.75*(1+0.25) = 3.44
D2 = 3.44*(1+0.25) = 4.297
D3 = 4.297*(1+0.08) = 4.6406
According to dividend-discount model,
P0 = D1/(R-G)
P0 = Current stock price
D1 - Dividend at t =1
R - Required rate
G - Growth rate
P2 = D3/(R-g) = 4.64/(0.18-0.08) = 46.44
3.
P0 is the present value of future dividends and P2
P0 = 3.44/(1+0.18)^1 + 4.297/(1+0.18)^2 + 46.44/(1+0.18)^2 = $39.33
P0 = $39.33