Question

Halliford Corporation expects to have earnings this coming year of $2.673 per share. Halliford plans to...

Halliford Corporation expects to have earnings this coming year of $2.673 per share. Halliford plans to retain all of its earnings for the next two years.​ Then, for the subsequent two​ years, the firm will retain 48% of its earnings. It will retain 18% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 21.4% 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 8.7%​, what price would you estimate for Halliford​ stock? The stock price will be $____. ​(Round to the nearest​ cent.)

Homework Answers

Answer #1
0 1 2 3 4 5 6
Retention rate*Return on new investment 100*21.4% 100*21.4% 48*21.4% 48*21.4 18*21.4%
EPS Growth Rate 21.40% 21.40% 10.27% 10.27% 3.85%
EPS Growth Rate 2.673 3.245 3.939 4.344 4.790 4.975
Retention Ratio 100 100 48 48 18 18
Dividend Payout ratio 0% 0% 52% 52% 82% 82%
Dividend=Div Payout*EPS 0 0 2.049 2.259 3.928 4.079

Price from year 5, at 3.85% constant growth rate = 4.079/(8.7%-3.85%) = $84.1459

P(0) = 2.049/(1.087)^3 + 2.259/(1.087)^4+ (3.928+84.1459)/(1.087)^5 = $61.25

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