Hart Enterprises recently paid a dividend, D0, of $3.50. It expects to have nonc
ID: 2769311 • Letter: H
Question
Hart Enterprises recently paid a dividend, D0, of $3.50. It expects to have nonconstant growth of 22% for 2 years followed by a constant rate of 4% thereafter. The firm's required return is 10%.
How far away is the horizon date?
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.
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
-Select-IIIIIIIVVItem 1
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.
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) Computation of the firm's horzon or continuing value.We have,
Firm's horzon or continuing value = D0 (1+g)n(1+g1) / (Ke - g)
Firm's horzon or continuing value = 3.50(1.22)2 (1.04) / (0.10 - 0.04)
Firm's horzon or continuing value = 5.42 / 0.06 = $ 90.30
(c) Computation of the firm's intrinsic value today.We have,
Intrinsic value = D0(1+g)/(1+Ke) + D0(1+g)2/(1+Ke)2 +D0 (1+g)n(1+g1) / (Ke - g)/ (1+Ke)2
Intrinsic value = 3.50(1.22)/(1.10) + 3.50(1.22)2 / (1.10)2 + 3.50(1.22)2 (1.04) / (0.10 - 0.06)/ (1.22)2
Intrinsic value = 3.88 + 4.31 + 74.63 = $ 82.82
Hence,the intrinsic value today is $ 82.82
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