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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

NONCONSTANT GROWTH VALUATION Hart Enterprises recently paid a dividend, D0, of $1.25. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm’s required return is 10%.

  1. a. How far away is the horizon date?
  2. b. What is the firm’s horizon, or continuing, value?
  3. c. What is the firm’s intrinsic value today, P ^ 0 ?

a.

Summary Introduction

To identify: The horizon date.

Non Constant Growth Valuation:

The company’s growth of dividend is not a constant rate. This implies that the growth sometimes increases and sometimes decreases and is considered as non-constant growth companies.

Horizon Date:

The horizon date is the date after, which the growth rate of the dividend is constant.

Horizon Value:

Horizon value is the value of the expected dividend that will be received after horizon date.

Explanation

As the company follows non-constant growth rate for 2 years and after 2 years, the c...

b.

Summary Introduction

To compute: The horizon value of the firm.

c.

Summary Introduction

To compute: The intrinsic value of the firm.

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