Question

Halliford Corporation expects to have earnings this coming year of $ 3.37 $3.37 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain 51 % 51% of its earnings. It will then retain 20 % 20% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 24.08 % 24.08% 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 9.7 % 9.7%​, what price would you estimate for Halliford​ stock? ​Note: Remenber that growth rate is computed​ as: retention rate times × rate of return.

Answer 1