Halliford Corporation expects to have earnings this coming year of $2.657 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 47% of its earnings. It will retain 17% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 26.1% 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 10.2%, what price would you estimate for Halliford stock?
| ROE= | 26.10% | Required rate= | 10.20% | Long term ret. Rate= | 17.00% | ||||
| Year | EPS previous year | Retention ratio | Growth rate | EPS current year | Dividend current year | Terminal value | Total Value | Discount factor | Discounted value |
| 1 | 0 | 100.00% | 26.100% | 2.657 | 0 | 0 | 1.102 | 0 | |
| 2 | 2.657 | 100.00% | 26.100% | 3.350477 | 0 | 0 | 1.214404 | 0 | |
| 3 | 3.350477 | 47.00% | 12.267% | 3.761480014 | 1.993584407 | 1.993584407 | 1.338273 | 1.489669 | |
| 4 | 3.761480014 | 47.00% | 12.267% | 4.222900767 | 2.238137406 | 40.55949268 | 42.79763009 | 1.474777 | 29.01973 |
| Long term growth rate = | =ROE*long term ret. Rate= | 4.437% | Value of stock = | Sum of discounted values= | 30.51 | ||||
| Where | |||||||||
| Growth rate = ROE*retention rate for corresponding year | |||||||||
| EPS curr. Year = EPS previous year*(1+growth rate) if not given | |||||||||
| Dividend current year = EPS current year*(1-retention ratio) | |||||||||
| Terminal value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate) | |||||||||
| Total value = Dividend + horizon value (only for last year) | |||||||||
| Discount factor=(1+ Required rate)^corresponding period | |||||||||
| Discounted value=total value/discount factor | |||||||||
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