Final answer:
The horizon value of Holt Enterprises is calculated using the dividend growth model at the end of Year 2, taking into account a 17% growth for the first two years and a constant growth of 6% thereafter. The intrinsic value today is found by summing the present values of these future dividends, discounted at the required return of 9%.
Step-by-step explanation:
To calculate the horizon, or continuing value, of Holt Enterprises, we need to find the value of the firm's dividends after the nonconstant growth period, meaning after Year 2 when the growth rate becomes constant at 6%. The formula for the horizon value, HV, at the end of Year 2 (which is the beginning of the constant growth period) is HV = D2 * (1+g) / (r-g), where D2 is the dividend at the end of Year 2, g is the constant growth rate, and r is the required return.
Holt Enterprises' D2 can be calculated as D0 * (1+17%)^2 since the company expects a 17% growth rate for the first 2 years. D0 is given as $1.25, so D2 = $1.25 * (1+17%)^2. Then we use the constant growth rate (g) of 6% and the required return (r) of 9% to find the horizon value.
To calculate the intrinsic value of the firm today, we need to find the present value (PV) of all expected future dividends. For the first two years, we calculate the PV of the dividends that are growing at 17%, and we add the PV of the horizon value that starts in Year 3. The formula for PV of a dividend in each year is D / (1+r)^t, where D is the dividend and t is the time in years.
Once we have all present values, we sum them up to find the intrinsic value of the firm today. This requires careful calculation, ensuring that the time value of money is properly accounted for with precise present value calculations at different time periods.