Question

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.)

Answer 1

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