Halliford Corporation expects to have earnings this coming year of $2.79 per sha

Question

Halliford Corporation expects to have earnings this coming year of

$2.79

per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two? years, the firm will retain

54%

of its earnings. It will then retain

17%

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

23.68%

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%?,

what price would you estimate for Halliford? stock?

Explanation / Answer

1 2 3 4 5 EPS [$] 2.79 3.45 4.27 4.81 5.43 Dividend payout [%] 0% 0.00% 46.00% 46.00% 83.00% Retention ratio [%] 100.00% 100.00% 54.00% 54.00% 17.00% Expected return [%] 23.68% 23.68% 23.68% 23.68% 23.68% Growth rate [%] 23.68% 23.68% 12.79% 12.79% 4.03% Dividend [$] 0 0 1.96 2.21 4.51 PVIF at 8.4% 0.92251 0.85102 0.78508 0.72424 PV of dividends at 8.4% 0.00 0.00 1.54 1.60 Cumulative PV of dividends - t1 to t4 3.14 Terminal value of expected dividends = 4.51*1.0403/(0.084-0.0403) 107.36 PV of terminal value of dividends = 107.36*0.72424 = 77.75 Estimated price = 3.14+77.75 = $     80.90

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