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Motor Homes Inc: Calculate what should be the current price of the stock.

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

Solution Preview

List all dividends prior to and including the first year of normal growth:
D0 = 1.50
D1 = 1.80
...

Solution Summary

With careful calculations, the solution shows the formulas to arrive at an answer for the price of the stock.

$2.19