Nonconstant growth valuation Hart Enterprises recently paid a dividend, D0, of $
ID: 2761060 • Letter: N
Question
Nonconstant growth valuation
Hart Enterprises recently paid a dividend, D0, of $1.75. It expects to have nonconstant growth of 12% for 2 years followed by a constant rate of 10% thereafter. The firm's required return is 12%.
A) How far away is the horizon date?
a. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
b. The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
c. 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.
d. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.
e. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
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, P0? Round your answer to two decimal places.
Explanation / Answer
A)The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2
B) & C)
Where
required return = 12.0% Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value 1 1.75 12.0% 1.96 1.96 1.12 1.75 2 1.96 12.0% 2.1952 120.736 122.9312 1.2544 98 Long term growth rate= 10.00% Value of stock = Sum of discounted value 99.75Related Questions
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