94
a.
The terminal, or horizon, date is the date when the growth rate becomes
constant.
This occurs at the end of Year 2.
b.
0
1
2
3




1.25
1.50
1.80
1.89
37.80 =
05
.
0
10
.
0
89
.
1

The horizon, or terminal, value is the value at the horizon date of all dividends
expected thereafter.
In this problem it is calculated as follows:
.
80
.
37
$
05
.
0
10
.
0
)
05
.
1
(
80
.
1
$
=

c.
The firm’s intrinsic value is calculated as the sum of the present value of all
dividends during the supernormal growth period plus the present value of the
terminal value.
Using your financial calculator, enter the following inputs:
CF
0
= 0, CF
1
= 1.50, CF
2
= 1.80 + 37.80 = 39.60, I/YR = 10, and then solve
for NPV = $34.09.
914
The problem asks you to determine the value of
3
P
ˆ
, given the following
facts:
D
1
=
$2, b = 0.9,
r
RF
= 5.6%,
RP
M
= 6%, and
P
0
= $25.
Proceed as follows:
Step 1:
Calculate the required rate of return:
r
s
= r
RF
+ (r
M
– r
RF
)b = 5.6% + (6%)0.9 = 11%.
Step 2:
Use the constant growth rate formula to calculate g:
%.
3
03
.
0
g
g
25
$
2
$
11
.
0
g
P
D
r
ˆ
0
1
s
=
=
+
=
+
=
Step 3:
Calculate
3
P
ˆ
:
3
P
ˆ
= P
0
(1 + g)
3
= $25(1.03)
3
= $27.3182
≈
$27.32.
Alternatively, you could calculate D
4
and then use the constant growth rate
formula to solve for
3
P
ˆ
:
D
4
= D
1
(1 + g)
3
= $2.00(1.03)
3
= $2.1855.
r
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '08
 WHITE
 Finance, Cash Flow Statement, Net Present Value, Dividend yield

Click to edit the document details