Question

Halliford Corporation expects to have earnings this coming year of $ 3.291$ per share. Halliford plans to retain all of its earnings for the next two years.​ Then, for the subsequent two​years, the firm will retain49 % of its earnings. It will retain 22 % of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 27.7 % 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 8.8 %.

what price would you estimate for Halliford​ stock?

what price would you estimate for Halliford​ stock?

Answer 1

Year	Retention Ratio	ROE	Growth rate
1	100%	27.70%	27.70%
2	100%	27.70%	27.70%
3	49%	27.70%	13.57%
4	49%	27.70%	13.57%
5 Onwards	22%	27.70%	6.09%

Earnings:

Assumption : Growth Rate 27.70% will statrt from Year1 and $ 3.291 is after considering growth rate of 27.7%

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	$            3.29	100.00%	$ -
2	$            4.20	100.00%	$ -
3	$            4.77	49.00%	$ 2.43
4	$            5.42	49.00%	$ 2.76
5	$            5.75	22.00%	$ 4.49

P4 = D5 / [ Ke - g ]

= 4.49 / [ 8.8% - 6.09% ]

= 4.49 / 2.71%

= 165.68

Price = PV of CFs from it.

Year	Particulars	CF	PVF @8.8%	Disc CF
1	D1	$                     -	0.9191	$          -
2	D2	$                     -	0.8448	$          -
3	D3	$                 2.43	0.7764	$      1.89
4	D4	$                 2.76	0.7136	$      1.97
4	P4	$            165.68	0.7136	$ 118.24
Price Today	$ 122.09