Problem 9-4 Nonconstant growth valuation Hart Enterprises recently paid a dividend, DO of
$1.00. It expects to have nonconstant growth of 14% for 2 years followed by a constant rate of
4% thereafter. The m s required return is 16% a. How far away is the horizon date? I. The
terminal, or horizon, date is infinity since common stocks do not have a maturity date. II. 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 III. The terminal, or horizon, date is the date when the
growth rate becomes nonconstant. This occurs at time zero. IV. The terminal, or horizon, date is
the date when the growth rate becomes constant. This occurs at the beginning of Year 2. V. The
terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the
end of Year 2. Select- 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, Po? Round your answer to two
decimal places.
Solution
Answer a.
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at
the end of Year 2.
Answer b.
D0 = $1.00
Growth rate for next 2 years is 14%, followed by an constant growth rate (g) of 4%
D1 = $1.00 * 1.14 = $1.14
D2 = $1.14 * 1.14 = $1.2996
D3 = $1.2996 * 1.04 = $1.3516
Required return, r = 16%
Horizon Value of Firm = D3 / (r - g)
Horizon Value of Firm = $1.3516 / (0.16 - 0.04)
Horizon Value of Firm = $11.26
Answer c.
Intrinsic Value of Firm = $1.14/1.16 + $1.2996/1.16^2 + $11.26/1.16^2
Intrinsic Value of Firm = $10.32.
Problem 9-4 Nonconstant growth valuation Hart Enterprises recently pa.pdf
1. Problem 9-4 Nonconstant growth valuation Hart Enterprises recently paid a dividend, DO of
$1.00. It expects to have nonconstant growth of 14% for 2 years followed by a constant rate of
4% thereafter. The m s required return is 16% a. How far away is the horizon date? I. The
terminal, or horizon, date is infinity since common stocks do not have a maturity date. II. 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 III. The terminal, or horizon, date is the date when the
growth rate becomes nonconstant. This occurs at time zero. IV. The terminal, or horizon, date is
the date when the growth rate becomes constant. This occurs at the beginning of Year 2. V. The
terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the
end of Year 2. Select- 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, Po? Round your answer to two
decimal places.
Solution
Answer a.
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at
the end of Year 2.
Answer b.
D0 = $1.00
Growth rate for next 2 years is 14%, followed by an constant growth rate (g) of 4%
D1 = $1.00 * 1.14 = $1.14
D2 = $1.14 * 1.14 = $1.2996
D3 = $1.2996 * 1.04 = $1.3516
Required return, r = 16%
Horizon Value of Firm = D3 / (r - g)
Horizon Value of Firm = $1.3516 / (0.16 - 0.04)
Horizon Value of Firm = $11.26
Answer c.
Intrinsic Value of Firm = $1.14/1.16 + $1.2996/1.16^2 + $11.26/1.16^2
Intrinsic Value of Firm = $10.32
