3. Problem 9.04 (Nonconstant Growth Valuation)

eBook Problem Walk-Through

Holt Enterprises recently paid a dividend, D₀, of $1.75. It expects to have nonconstant growth of 23% for 2 years followed by a constant rate of 9% thereafter. The firm's required return is 15%.

1. How far away is the horizon date?
   1. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
   2. The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
   3. The terminal, or horizon, date is Year 0 since the value of a common stock is the present value of all future expected dividends at time zero.
   4. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.
   5. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
   -Select-IIIIIIIVVItem 1
2. What is the firm's horizon, or continuing, value? Do not round intermediate calculations. Round your answer to the nearest cent.

   $

3. What is the firm's intrinsic value today, ? Do not round intermediate calculations. Round your answer to the nearest cent.

   $

4. Problem 9.08 (Preferred Stock Valuation)

Earley Corporation issued perpetual preferred stock with an 11% annual dividend. The stock currently yields 10%, and its par value is $100. Round your answers to the nearest cent.

1. What is the stock's value? $
2. Suppose interest rates rise and pull the preferred stock's yield up to 15%. What is its new market value? $