Question

Halliford Corporation expects to have earnings this coming year of $ 3.201 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 17% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 22.4% 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 9.2%​, what price would you estimate for Halliford​stock?

Answer 1

Formula	Year (n)	1	2	3	4	5	Perpetual
	Retention rate (a)	100.00%	100.00%	53.00%	53.00%	17.00%	17.00%
	Return on new investments (b)	22.40%	22.40%	22.40%	22.40%	22.40%	22.40%
(an-1*bn)	Growth rate (g)		22.40%	22.40%	11.87%	11.87%	3.81%
E*(1+g)	Earnings ('E)	3.20	3.92	4.80	5.37	6.00	6.23
E*(1-a)	Dividend (D)	-	-	2.25	2.52	4.98	5.17
Dperpetual/(k-g); k = 9.2%, g = 3.81%	Terminal cash flow						95.91
	Total cash flows (CF)	-	-	2.25	2.52	4.98	95.91
1/(1+d)^n	Discount factor @ 9.2%	0.916	0.839	0.768	0.703	0.644	0.644
(CF*Discount factor)	PV of cash flows	-	-	1.73	1.77	3.21	61.76
Sum of all PVs	NPV	68.48

Price per share = $68.48