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 $4.60. It expects zero growth in the next year In years 2 and 3, 3% 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?

Explanation / Answer

Solution.

Calculation for maximum price per share.

Based on a current dividend price of $5.76 and a growth rate of 9.000%,

Iin order to earn your 15.000% required rate of return the most you could pay for this stock would be

$104.64 per share.

Year Dividend Growth New Dividend 1            4.60          1.00                         4.60 2            4.60          1.03                         4.74 3            4.74 1.03                         4.88 4            4.88          1.18                         5.76 5            5.76          1.09                         6.28

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