Question

Halliford Corporation expects to have earnings this coming year of

$ 3.29

per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain

47 %

of its earnings. It will then retain

22 %

of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of

23.48 %

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

11.7 %

what price would you estimate for Halliford​ stock?

The price per share is

​$

​ (Round to the nearest​ cent.)

Answer 1

Year	0	1	2	3	4	5	6
EPS Growth rate			23.48%	23.48%	11.04%	11.04%	5.17%
EPS Growth rate		$     3.29	$     4.06	$        5.02	$     5.57	$     6.18	$     6.50
Retention Ratio		100%	100%	47%	47%	22%	22%
Dividend Payout		0%	0%	53%	53%	78%	78%
Dividend		$          -	$          -	$        2.66	$     2.95	$     4.82	$     5.07

From year 5 on, dividends grow at constant rate of 5.17%. Therefore,

P(4) = 4.82/(11.7% – 5.17%) =$73.81

P(0) = 2.66/1.117^3 + (2.95+73.81)/1.117^4

= $51.22