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Price of the Common Stock

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Rentz RV 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 25% 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 dividend, D0, was $1.25 RRV's beta is 1.20, the market risk premium is 5.50% and the risk-free rate is 3.00%. What is the current price of the common stock?

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Solution Summary

The solution illustrated a method of working out the current price of common stock when given the company's dividend status, the market risk premium and the risk-free rate in an attached Word document with all calculations and formulae displayed.

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Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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