Common stock value: Variable growth

1. 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 $3.40. It expects zero growth in the next year. In years
2 and 3, 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?
2. Lawrence Industries’ most recent annual dividend was $1.80 per share (D0 = $1.80), and the
firm’s required return is 11%. Find the market value of Lawrence’s shares when:
a) Dividends are expected to grow at 8% annually for 3 years, followed by a 5% constant
annual growth rate in years 4 to infinity.
b) Dividends are expected to grow at 8% annually for 3 years, followed by a 0% constant
annual growth rate in years 4 to infinity.
c) Dividends are expected to grow at 8% annually for 3 years, followed by a 10% constant
annual growth rate in years 4 to infinity.