Common stock value long dash variable growth personal finance problem 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 $2.30. it expects zero growth in the next year. in years 2 and 3, 3% growth is expected, and in year 4, 16% growth. in year 5 and thereafter, growth should be a constant 11% per year. what is the maximum price per share that an investor who requires a return of 15% should pay for home place hotels common stock

Current stock price () = $ 51.71

Explanation:

First we'll calculate the dividends for the next 5 years and the respective Terminal value in year .

i.e. ,

= $ 2.30

= (1 + )

= $ 2.30 × ( 1 + 0%) = $ 2.30

= (1 + )

= $ 2.30 × ( 1 + 3%) = $ 2.36

= (1 + )

= $ 2.36 × ( 1 + 3%) = $ 2.43

=   (1 + )

= $ 2.43 × ( 1 + 16%) = $ 2.819

=   (1 + )

=  $ 2.819 × ( 1 + 11%) = $ 3.129

∵ The growth rate after year = 11%

Required rate of return (r) = 15%

∴ Terminal value () =

Terminal value () =

Terminal value () = $ 86.85

Now, we'll compute the price per share :

Current stock price () =  

where;

n = respective years

r = required rate of return

∴ Current stock price () =  

Current stock price () = ( 2 + 1.78 + 1.59 + 1.611 + 1.55 + 43.18)

Current stock price () = $ 51.71

answer: in the short-run firms will respond by raising the price of turkey.

explanation: initially the long-run equilibrium is at a price of $5 per pound of turkey and a quantity of 50 million pounds per year. now, when webmd claims that a protein found in turkey will increase your expected lifespan by 4 years. the consumers demand for turkey will increase at every price shifting the demand curve to the right from d1 to d2. while, there will be no change in the supply curve in the short-run as it is not possible for producers to adjust supply so quickly. as a result the new equilibrium will occur at a higher price and a higher quantity of turkey.

thus, in the short run firms will respond by increasing the price of turkey, selling more quantity at a higher price and earning economic profits.