Sunrise Resorts Sdn Bhd is embarking on a 3-year renovation and expansion project. During this period, the construction will limit the company’s earnings, but once completed, it is expected to significantly boost earnings and dividends. Last year, the company paid a dividend of RM3.40. The company expects zero growth in dividends in the next year. However, it anticipates 5% growth in dividends during years 2 and 3, and 15% growth in year 4. From year 5 onwards, dividends are expected to grow at a constant rate of 10% per year.
What is the maximum price per share that an investor, who requires a 14% return, should be willing to pay for Sunrise Resorts’ common stock?

To determine the maximum price an investor should be willing to pay for Sunrise Resorts' common stock, we can use the **Dividend Discount Model (DDM)** with variable growth rates, also known as the **multi-stage growth model**. Here’s the step-by-step process to find the price per share:

### Step 1: Calculate the expected dividends for the first four years.

Given the growth rates for each year:

- **Year 1 (D₁):** The dividend remains constant at RM3.40.
  
  \[
  D₁ = RM3.40
  \]

- **Year 2 (D₂):** The dividend grows by 5% over Year 1.

  \[
  D₂ = D₁ \times (1 + 0.05) = 3.40 \times 1.05 = RM3.57
  \]

- **Year 3 (D₃):** The dividend grows by another 5% over Year 2.

  \[
  D₃ = D₂ \times (1 + 0.05) = 3.57 \times 1.05 = RM3.75
  \]

- **Year 4 (D₄):** The dividend grows by 15% over Year 3.

  \[
  D₄ = D₃ \times (1 + 0.15) = 3.75 \times 1.15 = RM4.31
  \]

### Step 2: Calculate the price of the stock at the end of Year 4 (P₄).

From Year 5 onwards, the dividends grow at a constant rate of 10%, so we can use the **Gordon Growth Model** to find the stock price at the end of Year 4, which is based on the dividend in Year 5 and the constant growth rate of 10%.

The formula for the Gordon Growth Model is:

\[
P₄ = \frac{D₅}{r - g}
\]

Where:
- \( D₅ = D₄ \times (1 + g) \) is the dividend in Year 5.
- \( r \) is the required return (14% or 0.14).
- \( g \) is the growth rate from Year 5 onwards (10% or 0.10).

First, calculate \( D₅ \):

\[
D₅ = D₄ \times (1 + 0.10) = 4.31 \times 1.10 = RM4.74
\]

Now calculate \( P₄ \):

\[
P₄ = \frac{4.74}{0.14 - 0.10} = \frac{4.74}{0.04} = RM118.50
\]

### Step 3: Calculate the present value of dividends and \( P₄ \).

To find the present value (PV) of these future dividends and the stock price, we discount them back to the present using the required return of 14% (or 0.14). The formula for discounting is:

\[
PV = \frac{D_t}{(1 + r)^t}
\]

Where:
- \( D_t \) is the dividend or stock price at time \( t \).
- \( r \) is the required return (14%).

Let’s calculate the present value of each dividend and \( P₄ \):

- **PV of D₁:**
  \[
  \frac{3.40}{(1 + 0.14)^1} = \frac{3.40}{1.14} = RM2.98
  \]

- **PV of D₂:**
  \[
  \frac{3.57}{(1 + 0.14)^2} = \frac{3.57}{1.2996} = RM2.75
  \]

- **PV of D₃:**
  \[
  \frac{3.75}{(1 + 0.14)^3} = \frac{3.75}{1.4815} = RM2.53
  \]

- **PV of D₄:**
  \[
  \frac{4.31}{(1 + 0.14)^4} = \frac{4.31}{1.6881} = RM2.55
  \]

- **PV of P₄:**
  \[
  \frac{118.50}{(1 + 0.14)^4} = \frac{118.50}{1.6881} = RM70.19
  \]

### Step 4: Calculate the total present value (price per share).

Now, sum up all the present values to get the total price:

\[
\text{Price per share} = 2.98 + 2.75 + 2.53 + 2.55 + 70.19 = RM80.99
\]

### Conclusion:

The maximum price per share that an investor who requires a 14% return should be willing to pay for Sunrise Resorts' common stock is **RM80.99**.

---

Do you want any details or clarifications on the steps? 

Here are some related questions:
1. How does the Dividend Discount Model work for constant growth scenarios?
2. What happens if the required return is lower or higher than 14%?
3. How does changing the growth rates affect the stock price?
4. Can this model be used for companies with irregular dividend patterns?
5. What are the limitations of using the Dividend Discount Model for stock valuation?

**Tip:** Always consider a margin of safety when investing, as future growth rates are not guaranteed.

Sunrise Resorts Sdn Bhd is embarking on a 3-year renovation and expansion project. During this period, the construction will limit the company’s earnings, but once completed, it is expected to significantly boost earnings and dividends. Last year, the company paid a dividend of RM3.40. The company expects zero growth in dividends in the next year. However, it anticipates 5% growth in dividends during years 2 and 3, and 15% growth in year 4. From year 5 onwards, dividends are expected to grow at a constant rate of 10% per year. What is the maximum price per share that an investor, who requires a 14% return, should be willing to pay for Sunrise Resorts’ common stock?

Determine the maximum price per share an investor should pay for Sunrise Resorts' stock using the Dividend Discount Model with variable growth rates. The problem involves calculating expected dividends over 4 years with different growth rates, applying the Gordon Growth Model from Year 5 onwards, and discounting future values to the present. Suitable for finance students at an undergraduate or MBA level.

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