Question

Halliford Corporation expects to have earnings this coming year of $3.081 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 54% of its earnings. It will retain 19% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 21.4% 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 8.2%​, what price would you estimate for Halliford​ stock?

Answer 1

ROE=	21.40%	Required rate=	8.20%	Long term ret. Rate=	19.00%
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%	21.400%	3.081	0		0	1.082	0
2	3.081	100.00%	21.400%	3.740334	0		0	1.170724	0
3	3.740334	54.00%	11.556%	4.172566997	1.919380819		1.919380819	1.266723	1.515233
4	4.172566997	54.00%	11.556%	4.654748839	2.141184466	53.90046024	56.04164471	1.370595	40.88856
	Long term growth rate =	=ROE*long term ret. Rate=	4.066%				Value of stock =	Sum of discounted values=	42.4
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