Question

Halliford Corporation expects to have earnings this coming year of $2.873 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 46% of its earnings. It will retain 18% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 20.1% 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 9.7%​, what price would you estimate for Halliford​ stock?

Answer 1

solution) Cost of Capital:9.7%

Return on New Projects:20.1%

Period: 1   2 3 4 5   P at 5

EPS $2.873 $ 3.45 $ 4.144 $ 4.976   $ 5.977   $ 7.17

Retention rate 100% 100% 46% 46% 18% 18%

Divident - - $ 1.90 $ 2.28 $ 1.07   $ 1.29

g (Prior Retention x r) - 23% 23% 11.5% 11.5% 5%

Dividend (and

Terminal Dividend) - -   $1.90   $2.28   $ 1.07 93.47

Discount Period 1 2 3 4 5 5

Sum of PV68.39$

Note: calculates the answers as of t = 4 so P = (4.75)/(.10-.05), but if you do it this way, it might be less clear to you that g = 5% going forward