Question

Enterprises recently paid a dividend, Dow of $1.00. It expects to have nonconstant growth of 13% for 2 years followed by a constant rate of 4% thereafter. The firm's required cturn is 12% a. How far away is the horizon date?

1. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2 .
II. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
III. The terminal, of horizon, date is infinity since common stocks do not have a maturity date.
IV. 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.
V. The terminal, or horizon, date is the date when the growth rate becomes non constant. This occurs at time zero:

Answer 1

The terminal, or horizon, date for a stock's growth rate occurs at the end of Year 2 when the initially nonconstant growth of 13% transitions to a constant growth rate of 4%.

Step-by-step explanation:

The question asks to identify when the terminal, or horizon, date occurs for a stock with nonconstant growth transitioning to constant growth. The terminal date is not when growth becomes nonconstant (option V) or infinite (option III); it is the point where growth rates stabilize to a constant rate indefinitely. Neither is it at the beginning of Year 2 (option I), nor at Year 0 (option IV), which is the present value of all future dividends. The correct answer is option II: The terminal, or horizon, date is the date when the growth rate becomes constant, which occurs at the end of Year 2. At this point, the growth rate settles at a steady 4%.