Halliford Corporation expects to have earnings this coming year of $ 2.71 per share. Halliford plans...

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Halliford Corporation expects to have earnings this coming yearof $ 2.71 per share. Halliford plans to retain all of its earningsfor the next two years. For the subsequent two? years, the firmwill retain 54 % of its earnings. It will then retain 22 % of itsearnings from that point onward. Each? year, retained earnings willbe invested in new projects with an expected return of 26.65 % 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 10.6 %.
What price would you estimate for Halliford? stock?
?Note: Growth rate is computed? as: retention rate times rate ofreturn.

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4.3 Ratings (825 Votes)

ROE=	26.65%	Required rate=	10.60%	Long term ret. Rate=	22.00%
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%	26.650%	2.71	0		0	1.106	0
2	2.71	100.00%	26.650%	3.432215	0		0	1.223236	0
3	3.432215	54.00%	14.391%	3.926145061	1.806026728		1.806026728	1.352899	1.334931
4	3.926145061	54.00%	14.391%	4.491156596	2.065932034	46.16967763	48.23560967	1.496306	32.23645
	Long term growth rate =	=ROE*long term ret. Rate=	5.863%				Value of stock =	Sum of discounted values=	33.57

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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Halliford Corporation expects to have earnings this coming yearof $ 2.71 per share. Halliford plans to retain all of its earningsfor the next two years. For the subsequent two? years, the firmwill retain 54 % of its earnings. It will then retain 22 % of itsearnings from that point onward. Each? year, retained earnings willbe invested in new projects with an expected return of 26.65 % 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 10.6 %.What price would you estimate for Halliford? stock??Note: Growth rate is computed? as: retention rate times rate ofreturn.