Question

Home Place​ Hotels, Inc., is entering into a​ 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that​ time, but when it is​ complete, it should allow the company to enjoy much improved growth in earnings and dividends. Last​ year, the company paid a dividend of ​$4.80. It expects zero growth in the next year. In years 2 and​ 3, 4​% growth is​ expected, and in year​ 4, 17​% growth. In year 5 and​ thereafter, growth should be a constant 12​% per year. What is the maximum price per share that an investor who requires a return of 18​% should pay for Home Place Hotels common​ stock?

The maximum price per share that an investor who requires a return of 18% should pay for Home Place Hotels common stock is​____

Answer 1

Price of Stock = PV of Cash flows from it.

Div Calculation:

Year	Div	Formula	Calculation
1	$      4.80	Same as D0	4.8
2	$      4.99	D1(1+g)	4.8(1.04)
3	$      5.19	D2(1+g)	4.99(1.04)
4	$      6.07	D3(1+g)	5.19(1.17)
5	$      6.80	D4(1+g)	6.07(1.12)

P4 = D5 / [ Ke - g ]

= 6.80 / [ 18% - 12% ]

= 6.80 / 6%

= 113.39

P0 :

Year	Particulars	CF	PVF @18%	Disc CF
1	D1	$      4.80	0.8475	$      4.07
2	D2	$      4.99	0.7182	$      3.59
3	D3	$      5.19	0.6086	$      3.16
4	D4	$      6.07	0.5158	$      3.13
4	P4	$ 113.39	0.5158	$   58.49
Stock Price				$   72.43