Hart Enterprises recently paid a divident, D o\' of $1.25. It expects to have no

Question

Hart Enterprises recently paid a divident, Do' of $1.25. It expects to have nonconstant growth of 20 percent for2 years followed by a constant rate of 5 percent thereafter. The firm's required return is 10 percent. A. How far away is the terminal, or horizon, date? B. What is the firm's horizon, or terminal, value? C. What is the firm's intrinsic value today,Po? Hart Enterprises recently paid a divident, Do' of $1.25. It expects to have nonconstant growth of 20 percent for2 years followed by a constant rate of 5 percent thereafter. The firm's required return is 10 percent. A. How far away is the terminal, or horizon, date? B. What is the firm's horizon, or terminal, value? C. What is the firm's intrinsic value today,Po?

Explanation / Answer

Dividend Paid(D0) = $1.25 Dividend Growth Rate (g) = 20% for 2years After 2 years the Dividend growth rate =5% Required Return (R ) = 10% Calculating Firm's TerminalValue: Firm's Terminal Value = [FCF (1+g) /(WACC - g) ] * Discount Factor at last year of horizonperiod Free Cash Flow (FCF) = $1.25 Dividend (or) FCF in 1st year(D1) = $1.25 (1+0.20) Dividend (or) FCF in 1st year(D1) = $1.50 Dividend (or) FCF in 2nd year(D2) = $1.50 (1+0.20) Dividend (or) FCF in 2nd year(D2) = $1.80 Dividend (or) FCF in 3rd year(D3)   = $1.80 (1+0.05) Dividend (or) FCF in 3rd year(D3)   = $1.89 Firms Terminal Value = [$1.89 / (0.10 - 0.05)]* 0.8264 Firms Terminal Value =$31.24 Calculating Firm's Intrinsic Valuetoday (P0) Calculating Stock Value in 3rd year(P3) = D4 / (R - g) Dividend Payment in 4th year(D4) = $1.89(1+0.05) = $1.98 Stock Value in 3rd year(P3) = $1.98 / (0.10 - 0.05) Stock Value in 3rd year(P4) = $39.60 Today's Stock Value(P0)    = [D1/(1+R) +D2/(1+R)2+ D3/(1+R)3+ P3/(1+R)3] Today's Stock Value(P0)    = [$1.50 / (1+0.10) + $1.80/ (1+0.10)2 + $1.89 / (1+0.10)3 + $39.60 /(1+0.10)3] Today's Stock Value (P0)  = [$1.36 + $1.49 + $1.42 +$29.75] Today's Stock Value(P0)   = $34.02 Dividend Paid(D0) = $1.25 Dividend Growth Rate (g) = 20% for 2years After 2 years the Dividend growth rate =5% Required Return (R ) = 10% Calculating Firm's TerminalValue: Firm's Terminal Value = [FCF (1+g) /(WACC - g) ] * Discount Factor at last year of horizonperiod Free Cash Flow (FCF) = $1.25 Dividend (or) FCF in 1st year(D1) = $1.25 (1+0.20) Dividend (or) FCF in 1st year(D1) = $1.50 Dividend (or) FCF in 2nd year(D2) = $1.50 (1+0.20) Dividend (or) FCF in 2nd year(D2) = $1.80 Dividend (or) FCF in 3rd year(D3)   = $1.80 (1+0.05) Dividend (or) FCF in 3rd year(D3)   = $1.89 Firms Terminal Value = [$1.89 / (0.10 - 0.05)]* 0.8264 Firms Terminal Value =$31.24 Calculating Firm's Intrinsic Valuetoday (P0) Calculating Stock Value in 3rd year(P3) = D4 / (R - g) Dividend Payment in 4th year(D4) = $1.89(1+0.05) = $1.98 Stock Value in 3rd year(P3) = $1.98 / (0.10 - 0.05) Stock Value in 3rd year(P4) = $39.60 Today's Stock Value(P0)    = [D1/(1+R) +D2/(1+R)2+ D3/(1+R)3+ P3/(1+R)3] Today's Stock Value(P0)    = [$1.50 / (1+0.10) + $1.80/ (1+0.10)2 + $1.89 / (1+0.10)3 + $39.60 /(1+0.10)3] Today's Stock Value (P0)  = [$1.36 + $1.49 + $1.42 +$29.75] Today's Stock Value(P0)   = $34.02
Hope it may help you Dividend Paid(D0) = $1.25 Dividend Growth Rate (g) = 20% for 2years After 2 years the Dividend growth rate =5% Required Return (R ) = 10% Calculating Firm's TerminalValue: Firm's Terminal Value = [FCF (1+g) /(WACC - g) ] * Discount Factor at last year of horizonperiod Free Cash Flow (FCF) = $1.25 Dividend (or) FCF in 1st year(D1) = $1.25 (1+0.20) Dividend (or) FCF in 1st year(D1) = $1.50 Dividend (or) FCF in 2nd year(D2) = $1.50 (1+0.20) Dividend (or) FCF in 2nd year(D2) = $1.80 Dividend (or) FCF in 3rd year(D3)   = $1.80 (1+0.05) Dividend (or) FCF in 3rd year(D3)   = $1.89 Firms Terminal Value = [$1.89 / (0.10 - 0.05)]* 0.8264 Firms Terminal Value =$31.24 Calculating Firm's Intrinsic Valuetoday (P0) Calculating Stock Value in 3rd year(P3) = D4 / (R - g) Dividend Payment in 4th year(D4) = $1.89(1+0.05) = $1.98 Stock Value in 3rd year(P3) = $1.98 / (0.10 - 0.05) Stock Value in 3rd year(P4) = $39.60 Today's Stock Value(P0)    = [D1/(1+R) +D2/(1+R)2+ D3/(1+R)3+ P3/(1+R)3] Today's Stock Value(P0)    = [$1.50 / (1+0.10) + $1.80/ (1+0.10)2 + $1.89 / (1+0.10)3 + $39.60 /(1+0.10)3] Today's Stock Value (P0)  = [$1.36 + $1.49 + $1.42 +$29.75] Today's Stock Value(P0)   = $34.02

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