Question

# Halliford Corporation expects to have earnings this coming year of \$ 3.24 per share. Halliford plans...

Halliford Corporation expects to have earnings this coming year of \$ 3.24 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain 55 % of its earnings. It will then retain 18 % of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 19.08 % per year. Any earnings that are not retained will be paid out as dividends. Assume​ Halliford's share count remains constant and all earnings growth comes from the investment of retained earnings. If​ Halliford's equity cost of capital is 9.4 %​, what price would you estimate for Halliford​ stock?

 Year 0 1 2 3 4 5 6 EPS Growth rate 19.08% 19.08% 10.49% 10.49% 3.43% EPS Growth rate \$     3.24 \$     3.86 \$     4.59 \$     5.08 \$     5.61 \$     5.80 Retention Ratio 100% 100% 55% 55% 18% 18% Dividend Payout 0% 0% 45% 45% 82% 82% Dividend \$          - \$          - \$     2.07 \$     2.28 \$     4.60 \$     4.76

From year 5 on, dividends grow at constant rate of 3.43%. Therefore,

P(4) = \$4.6/(9.4% – 3.43%) =\$77.05

P(0) =2.07/(1.094)^3 + (2.28+77.05)/(1.094)^4 = \$56.96