Home Place Hotels, Inc., is entering into a 3-year remodeling and expansion proj

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, 3% growth is expected, and in year 4,19% 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?

The maximum price per share that investor who requires a return of 17% should pay for Home Place Hotels common stock is $_____?

Explanation / Answer

Given here are

D0 = 4.2 , g1 = 3%, g2=19%, g3=9%, ks=17%

Price = D0/(1+ks)^1 + D1(1+g1)/(1+ks)^2 + D2(1+g2)/(1+ks)^3 + D3(1+g2)/(1+ks)^4 +  D4(1+g3)/(ks-g3)/(1+ks)^4

= 4.2/(1+.17) + 4.2(1.03)/(1.17)^2 + 4.33(1.03)/(1.17)^3 + 4.46(1.19)/(1.17)^4 + 5.3(1.09)/(.08)/(1.17)^4

=3.59 + 3.16 + 2.78 + 2.83 + 38.53 = 50.89 this is what max price is to be paid by investors

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