Question

Holt Enterprises recently paid a dividend, D0, of $1.50. It expects to have nonconstant growth of 12% for 2 years followed by a constant rate of 8% thereafter. The firm's required return is 18%.

Answer 1

The question involves applying a stock valuation model to Holt Enterprises' dividend-paying stock with varying growth rates and a required return of 18%.

Step-by-step explanation:

The question involves calculating the value of a stock from Holt Enterprises that has recently paid a dividend (D0) of $1.50 with nonconstant growth expected for the first two years and a constant growth rate thereafter. The essential factor in evaluating such investments is the expected rate of return, which consists of both the dividends and capital gains.

Since the 1990s, dividend rates have declined while capital gains have fluctuated significantly. The required return for this stock is set at 18%. To value the stock, we apply valuation models that factor in the nonconstant growth for the first two years at 12% followed by a perpetual growth rate of 8%.