Question

Halliford Corporation expects to have earnings this coming year of

$2.772

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

55%

of its earnings. It will retain

21%

of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of

22.2%

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

9.9%​,

what price would you estimate for Halliford​ stock?

The stock price will be

​$

​(Round to the nearest​ cent.)

Answer 1

Period	0	1	2	3	4	5	6
EPS growth rate = Retention rate * return on new investment			22.20%	22.20%	12.21%	12.21%	4.66%
EPS		2.772	3.387	4.139	4.645	5.212	5.455
Retention		100%	100%	55%	55%	21%	21%
Dividend payout		0%	0%	45%	45%	79%	79%
Dividend = dividend payout ratio * EPS		0	0	1.863	2.090	4.117	4.309
Price at end of Year 5						82.25
Total return & value of share		0	0	1.862722	2.090161	86.36743
PV factor @ 9.9%		0.9099	0.8280	0.7534	0.6855	0.6238
Present value		-	-	1.4033	1.4328	53.8718

Price of the stock at the end of Year 5

= P6/(Ke-g)

=Price at year 6/(cost of equity –growth rate)

= 4.309/(9.9%-4.66%)

= 4.309/5.24%

=82.25

Therefore Price of the stock at Period 0, at present = 1.4033 + 1.4328 + 53.8718 = $ 56.7079