Question

Common stock valuelong dashVariable growth  Personal Finance Problem   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 ​$1.70. It expects zero growth in the next year. In years 2 and​3, 4% growth is​ expected, and in year​ 4, 21​% growth. In year 5 and​ thereafter, growth should be a constant 8​% 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

Value of stock = present value of next 4 years dividend + present value of terminal value at end of 4 years

Terminal value at end of 4 years = Year 4 dividend * (1 + growth rate after 4 years) / (required return - growth rate after 4 years)

Present value = future value / (1 + required return)^{number of years}

The value of stock today = $23.44

Maximum price per share that an investor should pay is $23.44