Question 9 [6 points]

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&P500s 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 Hiltons required return given its historic risk and your preferred model for expected returns? [1 point]

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? [2 point]

c. Given the current price of $71.94 and your derived value, would you invest in Hilton? [1 point]

d. What could be a reason for the difference between your estimate of Hiltons value and the market price? [2 point]