Question
Diamond House Inc. has a beta of 1.50, the risk free rate is 12 percent and required return on market portfolio is 18 percent. The
Diamond House Inc. has a beta of 1.50, the risk free rate is 12 percent and required return on market portfolio is 18 percent. The table below shows the historical annual dividend: Year Dividend ($) 2020 2.89 2019 2.53 2018 2.22 2017 1.95 2016 1.71 2015 1.50
i. Estimate the intrinsic value of Diamond House Inc. stock. (9 marks)
ii. If the market price of the stock is $50, should you buy the stock? Justify. (3 marks)
(b) Home Place Hotel is entering into a 3 years remodeling and expansion project. The construction will have a limiting effect on earning 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 year 2 and 3, the growth is 5 percent and year 4 is 15 percent of growth rate. In year 5 and thereafter, growth should be constant 10 percent per year. Determine the maximum price per share that investor who requires return of 14 percent should pay for Home Place Hotels common share.
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