Question

Halliford Corporation expects to have earnings this coming year of

$3.332

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

50%

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

25.9%

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

10.1%​,

what price would you estimate for Halliford​ stock?

The stock price will be __ ​(Round to the nearest​ cent.)

Answer 1

ROE=	25.90%	Required rate=	10.10%	Long term ret. Rate=	17.00%
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%	25.900%	3.332	0		0	1.101	0
2	3.332	100.00%	25.900%	4.194988	0		0	1.212201	0
3	4.194988	50.00%	12.950%	4.738238946	2.369119473		2.369119473	1.334633	1.775109
4	4.738238946	50.00%	12.950%	5.35184089	2.675920445	49.0388138	51.71473424	1.469431	35.19371
	Long term growth rate =	=ROE*long term ret. Rate=	4.403%				Value of stock =	Sum of discounted values=	36.97
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