Motor Homes Inc. (MHI) is currently 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 a constant growth of 5% forever in earnings and dividends. The company’s last dividend was $1.50 (i.e., D0 = $1.5). a. If you require 18% rate of return on this stock, what should be the current stock price per share of MHI? b. Based on your calculation above, if the stock is currently selling for $25, should you buy the stock? Justify your answer.

Motor Homes Inc. (MHI) is currently 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 a constant growth of 5% forever in earnings and dividends. The company’s last dividend was $1.50 (i.e., D0 = $1.5). a. If you require 18% rate of return on this stock, what should be the current stock price per share of MHI? b. Based on your calculation above, if the stock is currently selling for $25, should you buy the stock? Justify your answer.

Name: Motor Homes Inc. (MHI) is currently in a stage of abnormally high grow
Uploaded: 2024-03-20T06:51:32.000Z
Channel: Bartleby
Description: Motor Homes Inc. (MHI) is currently 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 a cons

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section: Chapter Questions

Problem 21P

See similar textbooks

Similar questions

Blanket Company has paid quarterly dividends every quarter for the past 15 years. Lately, slowing sales have created a cash crunch for the company. While the company still has positive retained earnings, the retained earnings balance is close to zero. Should the company borrow to continue to pay dividends? Why or why not?
Wildhorse Corp. is a fast-growing company whose management expects it to grow at a rate of 30 percent over the next two years and then to slow to a growth rate of 13 percent for the following three years. If the last dividend paid by the company was $2.15 -What is the dividend for the 1st year? D1=$ - What is the dividend for the 2nd year? D2=$ - What is the dividend for the 3rd year? D3=$ - What is the dividend for the 4th year? D4=$ - What is the dividend for the 5th year? D5=$ - Compute the present value of these dividends if the required rate of return is 14 percent. Present Value =$
AAA is a fast-growing communications company. The company did not pay a dividend last year and is not expected to do so for the next two years. Last year the company’s growth accelerated, and management expects to grow the business at a rate of 40 percent for the next four years before growth slows to a more stable rate of 10 percent. In the third year, the company has forecasted a dividend payment of $1.10. Dividends will grow with the company thereafter. Calculate the value of the company’s stock at the end of its rapid growth period (i.e., at the end of four years). The required rate of return for such stocks is 15 percent. What is the current value of this stock?
KESSBEN Corporation is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends. However, investors expect KESSBEN to begin paying dividends, with the first dividend of GH¢1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 40 percent per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 9 percent per year. If the required return on the stock is 15 percent, what is the value of the stock today?
BBP, Inc., has experienced a recent resurgence in business as it has gained new national identity. Management is forecasting rapid growth over the next 4 years (annual rate of 15%). After that, it is expected that the firm will revert to its historical growth rate of 2% annually. The last dividend paid was $1.50 per share, and the required return is 10%. What is the current price per share, assuming equilibrium?" 29.56 39.56 28.56 27.56
Givens, Inc., is a fast-growing technology company that paid a $1.25 dividend last week. The company’s expected growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase?
Fresno Corp. is a fast growing company whose management expects it to grow at a rate of 30% over the next 2 years and then to slow to a growth rate of 18% for the following 3 years. If the last dividend paid by the company was $2.15, estimate the dividends for the next 5 years. Compute the present value of these dividends if the required rate of return is 14%.
Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 32 percent for the next three years, with the growth rate falling off to a constant 6.2 percent thereafter.If the required return is 14 percent and the company just paid a dividend of $2.85, what is the current share price? Antiques 'R' Us is a mature manufacturing firm. The company just paid a dividend of $11.40, but management expects to reduce the payout by 4.75 percent per year, indefinitely. If you require a return of 8 percent return on this stock, what will you pay for a share today?
Synovec Corporation is growing quickly. Dividends are expected to grow at a rate of 29 percent for the next three years, with the growth. rate falling off to a constant 6.8 percent, thereafter. The required return is 15 percent and the company just paid a dividend of $3.15. What are the dividends each year for the next four years? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g.. 32.16. What is the share price in three years? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16.
Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $1.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 55% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 5% per year. If the required return on the stock is 14%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)? Do not round intermediate calculations. Round your answer to the nearest cent.