Final answer:
To find the intrinsic value of Holt Enterprises' stock, calculate the present value of the first two years' dividends considering an initial 22% growth and the present value of the terminal value using the constant 4% growth rate thereafter. The present value of the dividends and terminal value are then added together, yielding an intrinsic value per share of approximately $29.88.
Step-by-step explanation:
To calculate the intrinsic value of a share of Holt Enterprises, we will use the nonconstant dividend growth model considering the different stages of growth. The dividend growth is 22% for the first two years and then 4% thereafter, while the required return is 16%.
The dividends for the first two years are calculated as follows:
- Year 1 dividend (D1) = Do(1 + growth rate) = $2.91(1 + 0.22) = $3.5492
- Year 2 dividend (D2) = D1(1 + growth rate) = $3.5492(1 + 0.22) = $4.3302
To find the terminal value (TV), or the present value of all dividends after the second year, we use the Gordon Growth Model formula:
TV = D2(1 + constant growth rate) / (required return - constant growth rate)
TV = $4.3302(1 + 0.04) / (0.16 - 0.04) = $31.7473
The intrinsic value (P0) is the present value of the estimated dividends for the first two years plus the present value of the terminal value. We discount each of them back to the present using the required return rate:
- PV of D1 = D1 / (1 + required return)^1 = $3.5492 / (1 + 0.16)^1 = $3.0571
- PV of D2 = D2 / (1 + required return)^2 = $4.3302 / (1 + 0.16)^2 = $3.2262
- PV of TV = TV / (1 + required return)^2 = $31.7473 / (1 + 0.16)^2 = $23.5945
Adding these up gives us the intrinsic value per share:
P0 = PV of D1 + PV of D2 + PV of TV = $3.0571 + $3.2262 + $23.5945 = $29.8778
Therefore, the intrinsic value per share of Holt Enterprises today is approximately $29.88.