Question

Halliford Corporation expects to have earnings this coming year of $3.077 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 50% of its earnings. It will retain 23% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 18.9% 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 11.1%, what price would you estimate for Halliford​stock?

Answer 1

EPS is growing by the amount of interest earned on the retained earnings accumulated up to last year.

Note:1 Interest has been calculated on the total of all previous year to the current year for example interest in the 4th year end shall be 18.9% of 8.903563=1.68(approx).

Note2: Cash flow of 5th year is the sum of dividend of 5th year and the value of stock at 5th year end as calculated in note 3

Note3: Value of Share at 5th year end=D6/ke-g

=4.186908/(.111-.04347)

Here Growth(g) is 23% of 18.9.because company retains only 23% of earning and invest the same.

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