Question

Halliford Corporation expects to have earnings this coming year of $ 3.29 per share. Halliford plans...

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.)

Homework Answers

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

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