Suppose that the firm recently paid a dividend D0=$2.20D0=$2.20. It expects to have nonconstant growth of gs=8%gs=8% for 2 years and then a constant rate of gn=6%gn=6% thereafter. The firms required return is rs=7%rs=7%.

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

P2=D2rsgP2=D2rsg

P2=D3(1+rs)3P2=D31+rs3

P2=D3rsgP2=D3rsg

P2=D2(1+rs)2P2=D21+rs2

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+P2P0=D11+rs1+D21+rs2+P2

P0=D1(1+rs)1+D2(1+rs)2+D3(1+rs)3+P2(1+rs)2P0=D11+rs1+D21+rs2+D31+rs3+P21+rs2

P0=D1(1+rs)1+D2(1+rs)2+P2(1+rs)2P0=D11+rs1+D21+rs2+P21+rs2

P0=P2(1+rs)2P0=P21+rs2

Dividend	Value
D1D1
D2D2
D3D3

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 8% for 3 years and then a constant rate of 6% thereafter. The firms required return is 7%.

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