Since the end of February, the shares of Hilton Worldwide Holdings Inc. lost almost 40% of their value. In light of this sharp drop, you suspect that Hilton Worldwide Holdings Inc. might currently be undervalued. You want to conduct a fundamental valuation of the company to figure out whether it is indeed the case that the stock price is currently below its fair value. You gather the following data: Hilton paid 60 cents of dividends per share last year. 

• Analysis expect Hilton will pay any dividend for the next two years. However, they forecast a dividend of 50 cents per share in year 3 and 60 cents per share in 4 years from now. After that they expect dividend per share will grow by 5% forever. 

• Historically Hilton and the S&P500 had a covariance of 0.048. 

• S&P500's historic standard deviation is 0.2. 

• Analyst expect the return on the S&P500 to be 5.5% next year. The T-Bill rate (=risk-free rate) is 0.5% and expected to remain so over the next year. 

Using CAPM to derive a required return for Hilton, answer the following questions: 

a. What is Hilton's required return given its historic risk and your preferred model for expected returns? 

b. Use your estimate in (a) in order to value a share in Hilton. What is its value per share using the Dividend Discount Model?

c. Given the current price of $71.94 and your derived value, would you invest in Hilton?

d. What could be a reason for the difference between your estimate of Hilton's value and the market price?

Answer rating: 100% (QA)

a Calculation of required return using CAPM Model Formula Riskfree rate of return Beta market risk p... View the full answer