Question

Restful RVs Inc. (RRV) is presently enjoying relatively high growth because of a surge in the demand for recreational vehicles. Management expects earnings and dividends to grow at a rate of 35% for the next 4 years, after which high gas prices will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last paid dividend, D0, was $2.25. RRV’s beta is 1.50, the market risk premium is 4.50%, and the risk-free rate is 3.00%. What is the intrinsic value of RRV’s common stock? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

Required Rate of Return = Rf + beta (Rm - Rf)

= 3% + 1.50(4.5%)

= 9.75%

D0 = 2.25

D1 = 2.25(1+ 0.035) = 3.0375

D2 = 3.0375(1+ 0.035) = 4.100625

D3 = 4.100625(1+ 0.035) = 5.53584375

D4 = 5.53584375(1+ 0.035) = 7.4733890625

D5 = 7.4733890625

Value of Stock =

=

= $ 68.34

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7.478384065 0. C0975 3.0375 4.100625 5.53584375 7.4733890625 + (1+0.0975) (1+0.097512 (1+0.097513 (1+0.0975) 4(1+0.0975) + + -