Question

Halliford Corporation expects to have earnings this coming year of $2.75

per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain 45% of its earnings. It will then retain 21% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 26.39% 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 11.9% , what price would you estimate for Halliford stock? Note: Remenber that growth rate is computed as: retention rate times × rate of return.

The price per share is?

Answer 1

B H 1 2 0 C D E F G Year 1 2 3 4 5 26.39% 26.39% 11.88% 11.88% 2.75 $ 3.48 $ 4.39 $ 4.91 $ 5.50 0% 0% 55% 55% 79% $ - $ - $ 2.42 $ 2.70 $ 4.34 $ 68.32 6 5.54% $ 5.80 79% $ 4.58 3 EPS Growth rate 4. EPS 5 X(1-Retention ratio) 6 Dividend 7 Add: Stock price in P4 8 9 Total 10 $ - $ - $ 2.42 $ 71.02 $ 4.34 $ 4.58 11 Stock price today $ 47.02

A B C D E F G H Year 1 2 3 EPS Growth rate 4. EPS 5 ×(1-Retention ratio) 6 Dividend 7 Add: Stock price in P4 2.75 =1-100% =+C5*C4 0.2639 =D3 -0.2639*0.45 =+C4*(1+D3) =+D4*(1+E3) =+E4*(1+F3) =1-100% 0.55 =E5 =+D5*D4 =+E5*E4 =+F5*F4 =G6/(11.9%-H3) =F3 =0.2639*0.21 =+F4*(1+G3) =+G4*(1+H3) 0.79 =+G5*G4 =+H5*H4 =G5 =+C6+C7 =+D6+D7 =+E6+E7 =+F6+F7 =+G6+G7 =+H6+H7 9 Total 10 11 Stock price today =NPV(11.9%,C9:F9)

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