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 46% of its earnings. It will then retain 21% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 25.96% 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 8.4%, what price would you estimate for Halliford stock? Note: Remenber that growth rate is computed as: retention rate x rate of return The price per share is $ . (Round to the nearest cent.)

Answer 1

Answer:

The price per share is $100.21

Working:

Year 1 25.96% 25.96% Rate of return (ROE) 25.96% 25.96% 25.96% 46% 11.9416% 5.4516% $4.7194 $4.9767 Retention (b) 100% 100% 46% 21% 25.9600% 25.9600% 11.9416% Growth rate (ROE* b) $2.9900 $3.7662 $4.2159 EPS Payout ratio (1- b) Dividend (EPS Payout ratio) Horizontal value at the end of year 4 PV factor (1/(1+8.4%) ^Year) 0% 0% 54% 54% 79% $2.5485 $3.9316 $0.00 $0.00 $2.2766 3.9316/(8.4%-5.45 16%) $133.3462 0.72424 0.78508 0.92251 0.85102 $0.00 $0.00 $1.79 $1.85 PV of dividends $3.63 Sum of PV of dividends $96.57 PV of Horizontal value $100.21 Estimated share value