Motor Homes Inc.(MHI)is presently in a stage of abnormally high growth because of a surge in the demand for motor homes.The company expects earnings and dividends to grow at a rate of 20% for the next 4 years,after which time there will be no growth (g=0)in earnings and dividends.The company's last dividend was $1.50.MHI has a beta of 1.6,the return on the market is currently 12.75%,and the risk-free rate is 4%.What should be the current price per share of common stock?

Question

Quizplus · Accepted Answer

Step 1 - Calculate the required rate of return using CAPM. k_e = k_F + β(k_M - k_F ) k_e= .04 + 1.6(.1275 - .04) k_e = 18% Step 2 - Calculate the present value of the high-growth cash flows. PV = 11ea7fdb_fbf9_8373_a768_e9f4900a4b89_TB2902_11 = $1.53 PV = 11ea7fdb_fbf9_8374_a768_d5b0903b29c4_TB2902_11 = $1.55 PV = 11ea7fdb_fbf9_8375_a768_0f3227f6c6f9_TB2902_11 = $1.58 PV = 11ea7fdb_fbf9_aa86_a768_d76388e4de49_TB2902_11 = $1.60 Step 3 - Add these cash flows together. 1.53 + 1.55 + 1.58 + 1.60 = $6.26 Step 4 - Calculate the zero-growth cash flows and discount them back to today. 11ea7fdb_fbf9_aa87_a768_1111e0955543_TB2902_11 = 11ea7fdb_fbf9_aa88_a768_b54e3f5e77e7_TB2902_11 11ea7fdb_fbf9_aa89_a768_1787a9822f5e_TB2902_11 = 11ea7fdb_fbf9_aa8a_a768_d917273d66e9_TB2902_11 = $17.28 PV = 11ea7fdb_fbf9_aa8b_a768_5fd94a8fda33_TB2902_11 = $8.91 Step 5 - Add the two discounted totals together to get the stock price today. 6.26 + 8.91 = $15.17