Question

Halliford Corporation expects to have earnings this coming year of $2.99 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain 49% of its earnings. It will then retain 19% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 19.71% 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 11.2%​,what price would you estimate for Halliford​ stock?​Note: Remenber that growth rate is computed​ as: retention rate ×rate of return.

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Answer 1