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 ​$3.80. It expects zero growth in the next year. In years 2 and​ 3, 6​% growth is​ expected, and in year​ 4, ​18% 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 ​15% should pay for Home Place Hotels common​ stock?

Answer 1

Dividend In year 1 D1 =3.80
D2 =3.80*1.06
D3=3.80*1.06^2
D4=3.80*1.06^2*1.18
D5 =3.80*1.06^2*1.18*1.09
Terminal Value =D5/(Required Rate-growth) =3.80*1.06^2*1.18*1.09/(15%-9%) =91.5277

Maximum Price you should pay for this stock =3.80/1.15+3.80*1.06/1.15^2+3.80*1.06^2/1.15^2+3.80*1.06^2*1.18/1.15^3+
3.80*1.06^2*1.18*1.09/1.15^4+91.5277/1.15^5 =64.37