• You are evaluating an investment in an hotel. The hotel will need a 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when completed, it should allow the hotel to enjoy much improved growth in earnings and dividends. Last year, the hotel paid a dividend of $11. It expects zero growth in the next year. In years 2 and 3, 12% growth is expected, and in year 4, 12% growth. In year 5 and thereafter, growth should be a constant 11% per year.

• What is the maximum price per share of common stock you should pay for this hotel, assuming your required return of 20% ?

• Please provide complete details of the calculations (formula/steps) of the above question. Also, elaborate If your requried return increases, would you pay more or less than the calcualted amount?

Answer rating: 100% (QA)

To calculate the maximum price per share of common stock you should pay for the hotel we can use the ... View the full answer