Suppose that the firm recently paid a dividend D0=$2.20 . It expects to have nonconstant growth of gs=11% for 2 years and then a constant rate of gn=3% thereafter. The firms required return is rs=10% .

According to the problem walk-through video, what is the formula for the terminal, or continuing value, at the end of year 2?

P2=D3rsg

P2=D3(1+rs)3

P2=D2(1+rs)2

P2=D2rsg

According to the problem walk-through video, what is the formula for the firms intrinsic value today?

P0=D1(1+rs)1+D2(1+rs)2+P2(1+rs)2

P0=P2(1+rs)2

P0=D1(1+rs)1+D2(1+rs)2+P2

P0=D1(1+rs)1+D2(1+rs)2+D3(1+rs)3+P2(1+rs)2

Dividend Value

D1

D2

D3

The firms horizon value is___ The firms intrinsic value is ___ .

Step 3: Practice: Nonconstant Growth Valuation Now its time for you to practice what youve learned. Suppose that the firm recently paid a dividend $2.20. It expects to have nonconstant growth of 11% for 3 years and then a constant rate of 3% thereafter. The firms required return is 10%.

The firms horizon, or continuing, value is___ and its intrinsic value today is___