Question

Halliford Corporation expects to have earnings this coming year of $ 3.283

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 45 %

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

24.5 % 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 9.9 %

what price would you estimate for Halliford​ stock?

Answer 1

Year	Retention Ratio	ROE	Growth rate
1	100%	24.50%	24.50%
2	100%	24.50%	24.50%
3	45%	24.50%	11.03%
4	45%	24.50%	11.03%
5 Onwards	17%	24.50%	4.17%

Earnings:

Assumption : Growth Rate 24.5% will statrt from Year1 and $ 3.283 is after considering growth rate of 24.5%

Year	EPS	Formula	Calculation
1	$      3.28	EPS0 * ( 1+g)	Given
2	$      4.09	EPS1 * ( 1+g)	3.283*1.245
3	$      4.54	EPS2 * ( 1+g)	4.09*1.1103
4	$      5.04	EPS3 * ( 1+g)	4.54*1.1103
5	$      5.25	EPS4 * ( 1+g)	5.04*1.0417

DIv Calculation:

Year	EPS	Retention Ration	Div ( EPS * ( 1 -Retention Ratio))
1	$      3.28	100.00%	$                                                      -
2	$      4.09	100.00%	$                                                      -
3	$      4.54	45.00%	$                                                 2.50
4	$      5.04	45.00%	$                                                 2.77
5	$      5.25	17.00%	$                                                 4.36

P4 = D5 / [ Ke - g ]

= 4.36 / [ 9.9% - 4.17% ]

= 4.36 / 5.73%

= 76.03

Price = PV of CFs from it.

Year	Particulars	CF	PVF @9.9%	Disc CF
1	D1	$       -	0.9099	$          -
2	D2	$       -	0.8280	$          -
3	D3	$   2.50	0.7534	$      1.88
4	D4	$   2.77	0.6855	$      1.90
4	P4	$ 76.03	0.6855	$   52.12
PV of Cash Inflows or Price	$   55.90