Question

Halliford Corporation expects to have earnings this coming year of

$ 2.749$2.749

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

48 %48%

of its earnings. It will retain

23 %23%

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

20.9 %20.9%

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

8.4 %8.4%​,

what price would you estimate for Halliford​ stock?

Answer 1

Workings

Notes:

1. Growth Rate on EPS = Expected return * Retention %

2. Dividend Payout = EPS * (100%-Retention)

3. Dividend to grow at 4.8% from year 5. Hence perpetual value of dividend calculated at year 4 (and no values for year 5 and 6).