You work for a large luxury hotel company. The company recently consider acquiring another hotel chain A. Your boss asked you to estimate the fair value to pay for A. You have gathered the following information: hotel chain A has beta 1.2, and the T-bill rate average is 2%, and the market risk premium is 8%. The last year Hotel A paid an annual dividend of $5 per share, you estimate the hotel A will has an annual growth rate of 4%.

1) What is the shareholders required rate of return for hotel A using CAPM?

2) Using the dividend discount model, what the fair value of Hotel A (hint: use the shareholder required rate of return you got in 1) as the discount rate)?

3) After seeing your estimation, your boss suggests that due to pandemics, hotel A can not maintain a 4% growth rate. So he suggests you for the next two years, using a 2% growth rate, and starting from the third year, use 4% indefinitely, how could this change your estimation of the fair value of hotel A.