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Halliford Corporation expects to have earnings this coming year of $3.29 per share. Halliford plans to...

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Finance

Halliford Corporation expects to have earnings this coming yearof $3.29 per share. Halliford plans to retain all of its earningsfor the next two years. For the subsequent two​ years, the firmwill retain 48 % of its earnings. It will then retain 20 %of itsearnings from that point onward. Each​ year, retained earnings willbe invested in new projects with an expected return of 27.77 %peryear. Any earnings that are not retained will be paid out asdividends. Assume​ Halliford's share count remains constant and allearnings growth comes from the investment of retained earnings. If​Halliford's equity cost of capital is 9.6 %, what price would youestimate for Halliford​ stock? ​Note: Remenber that growth rate iscomputed​ as: retention rate times × rate of return. The price pershare is ​$. ?. ​ (Round to the nearest​ cent.)

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4.5 Ratings (942 Votes)

ROE= 27.77% Required rate= 9.60% Long term ret. Rate= 20.00%
Year EPS previous year Retention ratio Growth rate EPS current year Dividend current year Terminal value Total Value Discount factor Discounted value
1 0 100.00% 27.770% 3.29 0 0 1.096 0
2 3.29 100.00% 27.770% 4.203633 0 0 1.201216 0
3 4.203633 48.00% 13.330% 4.763960464 2.477259441 2.477259441 1.316533 1.881654
4 4.763960464 48.00% 13.330% 5.398977338 2.807468216 73.24258529 76.0500535 1.44292 52.70567
Long term growth rate = =ROE*long term ret. Rate= 5.554% Value of stock = Sum of discounted values= 54.59
Where
Growth rate = ROE*retention rate for corresponding year
EPS curr. Year = EPS previous year*(1+growth rate) if not given
Dividend current year = EPS current year*(1-retention ratio)
Terminal value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate)
Total value = Dividend + horizon value (only for last year)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor
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