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 ​$4.20. It expects zero growth in the next year. In years 2 and​ 3, 5​% growth is​ expected, and in year​ 4, 16​% growth. In year 5 and​ thereafter, growth should be a constant 9​% per year. What is the maximum price per share that an investor who requires a return of 17​% should pay for Home Place Hotels common​ stock?

Answer 1

	Required rate=	17.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	4.2	0.00%	4.2		4.2	1.17	3.5897
2	4.2	5.00%	4.41		4.41	1.3689	3.22156
3	4.41	5.00%	4.6305		4.6305	1.601613	2.89115
4	4.6305	16.00%	5.37138	73.185	78.55638	1.87388721	41.92162
	Long term growth rate (given)=	9.00%			Value of Stock =	Sum of discounted value =	51.62
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor