Nonconstant growth valuation Hart Enterprises recently paid a dividend, D 0 , of
ID: 2713476 • Letter: N
Question
Nonconstant growth valuation
Hart Enterprises recently paid a dividend, D0, of $1.50. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 3% thereafter. The firm's required return is 14%.
How far away is the horizon date?
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
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.
The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
-Select-IIIIIIIVVItem 1 {C}
What is the firm's horizon, or continuing, value? Round your answer to two decimal places.
$
What is the firm's intrinsic value today, P0? Round your answer to two decimal places.
$
ANSWER FULLY AND EXPLAIN
Explanation / Answer
Horizon Date = The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
Firm's horizon or continuin value
Do = $1.50.
D2 = $1.50 * 1.20 * 1.20 = $2,.16
Horizon constant growth = 3%
Required Return = 14%
Horizon value = $2.16 * 1.03 / (0.14 - 0.03) = $20.23
Firm's intrinsic value = PV of dividends of the next two years + PV of terminal value
Or, Firm's intrinsic value = $1.5 * 1.2 / 1,14 + $1.5 * 1.2 * 1.2 / 1.14^2 + $20.23 / 1.14^2
Or, Firm's intrinsic value = $1.58 + $1.66 + $15.57 = $18.81
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