Question

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

Answer 1

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