Question

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 percent

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's

beta is 1.6, the return on the market is currently 12.75 percent, and the

risk-free rate is 4 percent. What should be the current price per share of

common stock?

Answer 1

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 4 + 1.6 * (12.75 - 4)

Expected return% = 18

	Required rate=	18.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.5	20.00%	1.8		1.8	1.18	1.5254
2	1.8	20.00%	2.16		2.16	1.3924	1.55128
3	2.16	20.00%	2.592		2.592	1.643032	1.57757
4	2.592	20.00%	3.1104	17.28	20.3904	1.93877776	10.52
	Long term growth rate (given)=	0.00%			Value of Stock =	Sum of discounted value =	15.17

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor