Halford Corporation expects to have earnings this coming year of $2.892 per shar

Question

Halford Corporation expects to have earnings this coming year of $2.892 per share. Halliford plans to retain all of its earnings for the next two years. Then, for the subsequent two years, the firm w I retain 49% of its earnings. It will retain 19% of its earnings from that point onward. Each year, retained earnings ill be invested in new projects with an expected return o 22.9% per year. Any earnings that are not retained will be paid out as di dends. Assume Hall ford's share count remains constant and all eamings growth comes om he investment o retained earnings f Ha d's equity cost o capital is 8.9%, what price would you estimate for Halliford stock? The stock price will be $ (Round to the nearest cent.)

Explanation / Answer

From year 5 on, dividends grow at constant rate of 4.35%. Therefore,

P(5) = 4.567/(8.9% –4.35%) = $100.37

Then P(0) = 2.28 / 1.0893+ 2.478 / 1.0954+ (4.377+100.37) / 1.0955

= $71.88

Year 0 1 2 3 4 5 6 Earnings 1 EPS Growth rate (Vs. Prior yr) 22.90% 22.90% 11.22% 11.22% 4.35% 2 EPS 2.892 3.554 4.368 4.858 5.403 5.638 Dividends 3 Retention Ratio 100% 100% 49% 49% 19% 19% 4 Dividend Payout Ratio 0 0 51% 51% 81% 81% 5 Div (2 *4) 0 0 2.228 2.478 4.377 4.567

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