Question

In: Accounting

Halliford Corporation expects to have earnings this coming year of $ 3.32 per share. Halliford plans...

Halliford Corporation expects to have earnings this coming year of $ 3.32 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 21 % of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 20.11 % 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 9.4 %​, what price would you estimate for Halliford​ stock?

The price per share is ​$

​ (Round to the nearest​ cent.)

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Expert Solution

Determination of price would you estimate for halliford stock
S.No Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
1 EPS Growth Rate(vs Prior Year) 20.11% 20.11% 9.65%(48%*20.11%) 9.65%(48%*20.11%) 4.22%(21%*20.11%
Growth rate=Rentention Ratio*Rate of return on New Investment
2 EPS - 3.32 3.99 4.79 5.25 5.76 6
Dividends
3 Rentention Ratio 100% 100% 48% 48% 21% 21%
4 Dividend Payout Ratio 0 0 52% 52% 79% 79%
5 Dividend - - 2.49 2.73 4.55 4.74
6 Discount factor at 9.40% 0.91 0.84 0.76 0.7 0.64 0.58
7 Value(5*6) 1.89 1.91 2.91 2.75
Add: Present Value of constant dividends 53.07(note)
Price of the share is 1.89 1.91 2.91 55.82
Working Notes
From year 5 Dividend will grow at 4.22% Approxmately Constant and therefore
Price at year 5 =4.74/(0.0940-0.0422)
Price at year 5 =91.50*.58=53.07
Price would you estimate for halliford shares is( 55.82+1.89+1.91+2.91)=$62.53

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