Question

Halliford Corporation expects to have earnings this coming year of $ 2.838 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 53 % 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 26.3 % 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 11.3 %​, what price would you estimate for Halliford​ shares? The share price will be ​$ nothing. ​(Round to the nearest​ cent.)

Answer 1

Calculation of Price of Halliford shares

Year	ROE	Retention Ratio	Growth Rate	Dividend Payout Ratio	EPS	Dividend/Price	PVF @11.3%	Present Value of Cash Flows
			(ROE*Retention Ratio)	(100 - Retention Ratio)	=EPS * (1 + Growth rate)	Dividend = EPS * Dividend Payot Ratio)
1	26.3%	100%	26.30%	0%	2.838	0	0.898472597	0
2	26.3%	100%	26.30%	0%	3.584394	0	0.807253007	0
3	26.3%	53%	13.939%	47%	4.08402268	1.919490659	0.725294705	1.392196412
4	26.3%	53%	13.939%	47%	4.653294601	2.187048462	0.651657417	1.425206352
4	26.3%	19%	4.997%	81%	4.88581956	62.7877833(Working Note)	0.651657417	40.9161247
							Intrinsic Value	43.73352747 or 43.73

Working Note:

Calculation of Terminal Value Price

Terminal Value Price at year 4 = Expected Dividend in year 5 / ( Cost of Capital - Growth rate)

=(4.88581956 * 81%) / (0.113 - 0.04997)

= 3.957513983 / 0.06303

= 62.78778333