Final answer:
The horizon value represents the present value of all future dividends after the horizon date, with dividends growing at a stable rate. The Gordon Growth Model is typically used to calculate this value, which requires specific figures for dividends, the required rate of return, and the growth rate to determine the exact value.
Step-by-step explanation:
The question deals with the concept of horizon value or continuing value, which refers to the present value of all future dividends beyond a certain point in time, known as the 'horizon date.' This is a common valuation method in finance and is particularly relevant when evaluating perpetuity with constant growth. To calculate the horizon value, we assume that dividends grow at a stable rate indefinitely after the horizon date.
When the growth rate becomes constant after Year 2, we can use the Gordon Growth Model to find the horizon value. The formula is:
D / (kg)
where D is the dividend just after the horizon date, k is the required rate of return, and g is the growth rate. Using this model, without specific figures for D, k, and g, we cannot determine the correct answer from the options provided. However, if all dividends expected thereafter grow at a constant rate, the present value of those dividends can be determined using this model.
It is also important to understand, as shown in the additional information provided, that a fixed absolute growth (like a $2 raise each year) results in a decreasing growth rate percentage over time. Such insights are crucial when considering investment returns and growth rates over time.