1) Shimmer\'s is presently enjoying relatively high growth because of a surge in

Question

1) Shimmer's 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 30% for the next 4 years, after which gas prices will probably reduce the growth rate in earnings and dividends to zero, g = 0. The company's last dividend, D0, was $1.25. Shimmer's beta is 1.2, the market risk premium is %5.25, and the risk-free rate is 3.00%. What is the intrinsic value of Shimmer's common stock? (Please provide work)

Explanation / Answer

r = 3% + 1.2*5.25% =9.30% intrinsic value of Shimmer's common stock = 1.25*1.3/(1+9.30%) + 1.25*1.3^2/(1+9.30%)^2 + 1.25*1.3^3/(1+9.30%)^3 + 1.25*1.3^4/(1+9.30%)^4 + (1.25*1.3^4/9.3%)/(1+9.30%)^4 =$34.76

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