Save Submit Assignment for Grading Questions Problem 9.04 Question 1 of 8 Check

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Save Submit Assignment for Grading Questions Problem 9.04 Question 1 of 8 Check My Work (3 remaining) 3. O 9-6: Valuing Nonconstant Growth Stocks Nonconstant growth valuation Hart Enterprises recently paid a dividend, Do, of $1.75. It expects to have nonconstant growth of 24% for 2 years followed by a constant rate of 3% thereafter. The firm's required return is 16%. a. How far away is the horizon date? 5, 6. O 11 1. The terminal, or horizon, date is Year O since the value of a common stock is the present value of all future expected dividends at time zero II. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero. III. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at e beginning of Year 2. IV. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2. V. The terminal, or horizon, date is infinity since common stocks do not have a maturity date. b. What is the firm's horizon, or continuing, value? Round your answer to two decimal places. c. What is the firm's intrinsic value today, Po? Round your answer to two decimal places. Check My Work (3 remaining) Icon Key

Explanation / Answer

a) Ans: Option IV. 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 is the present value of the dividends with constant growth rate.

Horizon value (P2) = D2 * (1+g)/(k-g)

D1 = D0 * (1+24%) = 1.75 * 1.24 = $2.17

D2 = D1 * (1+24%) = 2.17 * 1.24 = $2.6908

Horizon value (P2) = 2.6908 * (1+3%)/(16%-3%) = 2.6908*1.03/(0.16-0.03) = $21.3194

c) Intrinsic value today is the present value of D1, D2 and horizon value

P0 = D1/(1+k) + D2/(1+k)2 + P2/(1+k)2

= 2.17/1.16 + 2.6908/1.162 + 21.3194/1.162 = $19.7142

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