Rentz RVs Inc. (RRV) is presently enjoying relatively high growth because of a s
ID: 2664782 • Letter: R
Question
Rentz RVs 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 hiigh gas prices will probably reduce the growth rate in earnings and dividends to zero, i.e. g=0. The company's last dividend D(o) was $1.25. RRV's required return is 9.60%. What is the current price of the common stock using DCF?NOTE: Please use financial calculator TVM to produce the results.
Explanation / Answer
Expected earnings and dividends growth rate = 25% for the next 4 years
Last dividend paid (D0) = $1.25
Required Return (R) = 9.60%
Current price of the common stock using DCF =?
Dividend paid in 1st year (D1) = $1.25 (1+0.25) = $1.5625
Dividend paid in 2nd year (D2) = $1.5625 (1.25) = $1.9531
Dividend paid in 3rd year (D3) = $1.9531 (1.25) = $2.4414
Dividend paid in 4th year (D4) = $2.4414 (1.25) = $3.0517
Dividend paid in 5th year (D5) = $3.0517 = $3.0517
Dividend paid in 6th year (D6) = $30517
P0 = [D1 / (1+R)1] + [D2 / (1+R)2] + [D3 / (1+R)3 + [D4 / (1+R)4] + [D5 / (1+R)5] +
[P5 / (1+R)5]
P5 = [D6 / (R – g)]
P5 = [$3.0517 / (0.096 – 0)]
P5 = $31.78
P0 = [$1.5625 / (1.096)1 ] + [$1.9531 / (1.096)2] + [$2.4414 / (1.096)3
+ [$3.0517 / (1.096)4 + $3.0517 / (1.096)5 + $31.78 / (1.096)5]
P0 = [$1.43 + $1.63 + $1.85 + $2.11 + $1.93 + $20.095]
P0 = $29.045
Current Price of the Common Stock using DCF (P0 ) = $29.045