Common stock value—Variable growth
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 $2.20. It expects zero growth in the next year. In years 2 and 3, 4% growth is expected, and in year 4, 22% growth. In year 5 and thereafter, growth should be a constant 12% 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?
The maximum price per share that an investor who requires a return of 15% should pay for Home Place Hotels common stock is
Step by stepSolved in 3 steps with 2 images
- Answer the attached in excel format explaining formulasarrow_forwardNonconstant Dividend Growth Valuation Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $1.25 coming 3 years from today. The dividend should grow rapidly - at a rate of 65% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 10% per year. If the required return on the stock is 18%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)? Do not round intermediate calculations. Round your answer to the nearest cent. $arrow_forwardusing excel please provide answerarrow_forward
- Nonearrow_forwardVideo Excel Online Structured Activity: Nonconstant growth Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 20% per year - during Years 4 and 5; but after Year 5, growth should be a constant 6% per year. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. X Open spreadsheet If the required return on Computech is 18%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations. Check My Work Reset Problemarrow_forwardPls show proper steps correctly with explanation.arrow_forward
- Nonearrow_forwardGrowth firmarrow_forwardIntegrative: Conflicting Rankings The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years has been 22%, and HFGC managers believe that 22% is a reasonable figure for the firm's cost of capital. To sustain a high growth rate, HFGC's CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the firm's production capacity, and the second project involves introducing one of the firm's products into a new market. Cash flows from each project appear in the following table: Year Plant expansion Product introduction 0 -4,000,000 -500,000 1 2,000,000 375,000 2 2,000,000 350,000 3 3,000,000 400,000 4 3,000,000…arrow_forward
- Do not use Excel or Matrix You have to show your work 6. Sun Co., an electronics product manufacturer, is expecting to pay a dividend of $2 per share this year (end of the year, at t = 1). Based on market research for its products and production costs, Sun expects the dividend to grow at the rate of 15% per year in years two and three. Subsequently, the growth will be closer to the industry average, which is 4%. Sun’s cost of equity is 13%, what must be the a. value of each share three years from now, after the dividend for the third year is paid? b. value of each share now?arrow_forwardCut off at the bottom is "Expansion percentage change in EPS". Thank you.arrow_forwardWeb Cites Research projects a rate of return of 20% on new projects. Management plans to plow back 30% of all earnings into the firm. Earnings this year will be $2 per share, and investors expect a 12% rate of return on the stock. a. What is the sustainable growth rate? (Round your answer to 2 decimal places.) Sustainable growth rate Stock price b. What is the stock price? (Round your answer to the nearest cent.) % Present value of growth opportunities ▸ c. What is the present value of growth opportunities? (Do not round Intermediate calculations. Round your answer to the nearest cent.) P/E ratio d. What is the P/E ratio? (Do not round Intermediate calculations. Round your answer to 3 decimal places.)arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education