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Halliford Corporation expects to have earnings this coming year of $3.297 per share. Halliford plans to...

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Halliford Corporation expects to have earnings this coming yearof $3.297 per share. Halliford plans to retain all of its earningsfor the next two years.? Then, for the subsequent two? years, thefirm will retain 47% of its earnings. It will retain 17% of itsearnings from that point onward. Each? year, retained earnings willbe invested in new projects with an expected return of 27.4 % 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 9.2%?, what price would youestimate for Halliford? stock?

Answer & Explanation Solved by verified expert
3.6 Ratings (574 Votes)

ROE= 27.40% Required rate= 9.20% Long term ret. Rate= 17.00%
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% 27.400% 3.294 0 0 1.092 0
2 3.294 100.00% 27.400% 4.196556 0 0 1.192464 0
3 4.196556 47.00% 12.878% 4.736988482 2.510603895 2.510603895 1.302171 1.928014
4 4.736988482 47.00% 12.878% 5.347017858 2.833919465 65.2999435 68.13386296 1.42197 47.91511
Long term growth rate = =ROE*long term ret. Rate= 4.658% Value of stock = Sum of discounted values= 49.84
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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Transcribed Image Text

Halliford Corporation expects to have earnings this coming yearof $3.297 per share. Halliford plans to retain all of its earningsfor the next two years.? Then, for the subsequent two? years, thefirm will retain 47% of its earnings. It will retain 17% of itsearnings from that point onward. Each? year, retained earnings willbe invested in new projects with an expected return of 27.4 % 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 9.2%?, what price would youestimate for Halliford? stock?

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