Question

Halliford Corporation expects to have earnings this coming year of $3.29 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain 48 % of its earnings. It will then retain 20 %of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 27.77 %per year. Any earnings that are not retained will be paid out as dividends. Assume​ Halliford's share count remains constant and all earnings growth comes from the investment of retained earnings. If​ Halliford's equity cost of capital is 9.6 %, what price would you estimate for Halliford​ stock? ​Note: Remenber that growth rate is computed​ as: retention rate times × rate of return. The price per share is ​$. ?. ​ (Round to the nearest​ cent.)

Answer 1

ROE=	27.77%	Required rate=	9.60%	Long term ret. Rate=	20.00%
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%	27.770%	3.29	0		0	1.096	0
2	3.29	100.00%	27.770%	4.203633	0		0	1.201216	0
3	4.203633	48.00%	13.330%	4.763960464	2.477259441		2.477259441	1.316533	1.881654
4	4.763960464	48.00%	13.330%	5.398977338	2.807468216	73.24258529	76.0500535	1.44292	52.70567
	Long term growth rate =	=ROE*long term ret. Rate=	5.554%				Value of stock =	Sum of discounted values=	54.59

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