Halliford Corporation expects to have earnings this coming year of per share. Halliford plans to retain all of its earnings for

Question

3 years ago

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Halliford Corporation expects to have earnings this coming year of per share. Halliford plans to retain all of its earnings for

the next two years. Then, for the subsequent two years, the firm will retain of its earnings. It will retain of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of per year. Any earnings that are not retained will be paid out as dividends. Assume Halfords share count remains constant and all earnings growth comes from the investment of retained earnings. If Halliford equity cost of capital is , what price would you estimate for Halliford stock

Business

1 answer:

STatiana [176] · Answer 1 · 2022-02-22T21:36:04+03:00

Answer:

P₀ = $59.45

Explanation:

the numbers are missing so I looked for a similar question:

expected EPS = $2.775
retain 0% of earnings (years 1 - 2)
retain 48% of earnings (years 3 - 4)
then retain 23%
expected return on new projects = 22.4%
Re = 10.7%

growth rate = retention rate x return on new projects

g₁ = not given EPS₁ = $2.775

g₂ = 1 x 22.4% = 22.4% EPS₂ = $3.3966

g₃ = 1 x 22.4% = 22.4% EPS₃ = $4.1574

g₄ = 0.48 x 22.4% = 10.752% EPS₄ = $4.6044

g₅ = 0.48 x 22.4% = 10.752% EPS₅ = $5.0995

g₆ = 0.23 x 22.4% = 5.152% EPS₆ = $5.3622

dividend payout ratio expected dividend

year 1 = 0 $0

year 2 = 0 $0

year 3 = 0.52 $2.1618

year 4 = 0.52 $2.3943

year 5 = 0.77 $3.9266

year 6 = 0.77 $4.1289

since the growth rate became constant at year 6, we can find the terminal value for year 5:

terminal value year 5 = $4.1289 / (10.7 - 5.152%) = $74.4214

P₀ = $0/1.07 + $0/1.07² + $2.1618/1.07³ + $2.3943/1.07⁴ + $3.9266/1.07⁵ + $74.4214/1.07⁵ = $0 + $0 + $1.7647 + $1.8266 + $2.7996 + $53.0614 = $59.45