P7-8

Using the constant-growth dividend model or Gordon growth model find the value of each firm shown in the following table?

Firm Dividend expected next year Dividend growth rate Required return

A 1.2 8% 13%

B 4 5% 15%

C 0.65 10% 14%

D 6 8% 9%

E 2.25 8% 20%

P7-14

Variable growthHome 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 completed, it should allow the company to enjoy much improved growth in earnings and dividends. Last year, the company paid a dividend of $3.40. It expects 0 growth in the next year. In the 2nd and 3rd year, 5% growth is expected, and in year 4, 15% growth. In year 5 and thereafter, growth should be a constant 10% per year. What is the maximum price per share that an investor who requires a return of 14% should pay for Home Place Hotels common stock?