Question

Halliford Corporation expects to have earnings this coming year of $ 3.18 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain 52 % of its earnings. It will then retain 17 % of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 18.99 % 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 11.4 %​, what price would you estimate for Halliford​ stock?

Answer 1

Particulars	1 year	2 year	3 year	4 year	5 year
Earnings
ROE	0.1899	0.1899	0.1899	0.1899	0.1899
Retention ratio	1	1	0.52	0.52	0.17
EPS growth rate	=B3*B4	=C3*C4	=D3*D4	=E3*E4	=F3*F4
EPS	3.18	=B6*(1+C5)	=C6*(1+D5)	=D6*(1+E5)	=E6*(1+F5)
Dividends
Dividend payout ratio	=1-B4	=1-C4	=1-D4	=1-E4	=1-F4
Dividend	=B6*B9	=C6*C9	=D6*D9	=E6*E9	=F6*F9
Terminal value at year 4				=F10/(11.4%-F5)
PV factor@ 11.4%			=1/(1+11.4%)^3	=1/(1+11.4%)^4
Price of the stock					=(D12*D9)+((E10+E11)*E12