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 $1.95. RRV’s beta is 1.50, the market risk premium is 4.75%, 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 = Risk Free rate + Beta (Market rate- Risk Free rate)
			3.00% + 1.50 *4.75% = 10.125%
D 0		1.95
D1	1.95+35%	2.63
D2	2.63+35%	3.55
D3	3.55+35%	4.79
D4	4.79+35%	6.47
D5		6.47
Horizon value at Year-4 = D5 / Required rate
		6.47/10.125%= 63.90
Price:
Year	Cashflows	PVF at 10.125%	Present value
1	2.63	0.908059	2.388195
2	3.55	0.824571	2.927228
3	4.79	0.748759	3.586557
4	6.47	0.679918	4.399067
4	63.9	0.617405	39.4522
Price of Stock			52.75