Question

Holt Enterprises recently paid a dividend, D0, of $4.00. It expects to have nonconstant growth of 24% for 2 years followed by a constant rate of 3% thereafter. The firm's required return is 10%. What is the firm's horizon, or continuing, value? Do not round intermediate calculations. Round your answer to the nearest cent

Answer 1

To calculate the horizon, or continuing, value of Holt Enterprises, you can use the Gordon growth model.

Step-by-step explanation:

The horizon, or continuing, value of Holt Enterprises can be calculated using the Gordon growth model. The formula for calculating the horizon value is:

Horizon Value = (D1 x (1 + g)) / (r - g)

Where:
D1 = dividend expected at the end of the nonconstant growth period
g = constant growth rate after the nonconstant growth period
r = required return or discount rate

Given that the dividend D0 is $4.00, the constant growth rate is 3%, and the required return is 10%, we can calculate the horizon value as follows:

Horizon Value = ($4.00 x (1 + 0.03)^2) / (0.1 - 0.03)

Calculating this equation will give you the firm's horizon value.