Question

Holt Enterprises recently paid a dividend, D0, of $3.50. It expects to have nonconstant growth of 19% for 2 years followed by a constant rate of 10% thereafter. The firm's required return is 13%. How far away is the horizon 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. The terminal, or horizon, date is infinity since common stocks do not have a maturity date.

Answer 1

Answer:

Holt Enterprises

The terminal, or horizon, date is:

the date when the growth rate becomes constant.  This occurs at the end of Year 2.

Explanation:

a) Recent dividend, DO = $3.50

Expected non-constant growth = 19%

Period of non-constant growth = 2 years

Expected constant rate of growth = 10% after 2 years of non-constant growth

The firm's required return rate = 13%

b) The terminal or horizon date is, therefore, from the end of year 2 or beginning of year 3, when constant growth sets in with the Holt stock.

At the horizon date the dividend, D3, must have grown to $5.42 approx.

Then, the horizon value is given by the formula = D3 / required rate - growth rate

 = 5.42 / 0.13 - 0.01

= 5.42 / 0.03

= $181