Hallford Corporation expects to have earnings this coming ye

Hallford Corporation expects to have earnings this coming year of $2.626 per share. Halliford plans to retain all of its earnings for the next two years. Then, for the arnings ten that point o ward Each year ret med esmines wil be mess subsequent two years, the firm will retain 48% of its earnings. It will retain 23% of its e projects with an expected return of 18.5% per year. Any earnings rat are not retained will be paid out as dividends all earnings growth comes from the investment of retained earnings. H Halliford\'s equity cost of capital is 10.9%, what price would you estimate for Halford stock? nee The stock price will be S(Round to the nearest cent.)

Solution

growth in 3rd and 4th year = Retention ratio * Expected Return = 48% * 18.5% = 0.0888 or 8.88%
growth after 5th year till perpetuity = 23% * 18.5% = 4.255%

Dividend at year 3 (D3)= ( 1- retention percentage ) * Earnings per year* ( 1+ growth) =(1-48%)*2626 * ( 1+ 8.88%)
=1486.7781
Dividend at year 4(D4) = ( 1- retention percentage ) * Earnings per year* ( 1+ growth)² = 1618.8041`
Dividend at year 5 till maturity D(5)= Dividend at year 4 * ( 1+ stable growth) = 1618.8041 * ( 1 + 4.255%) = 1687.684
Cost of capital r = 10.9%
PV of stock = D3/(1+r)³ + D4/(1+r)⁴ + [D5/(r-g)]/(1+r)⁴ = 1486.7781/(1.109³) + 1618.8041/(1.109)⁴ + [1687.684/(.109 - 0.04255)]/1.109⁴ = 18951.02

Stock price = 18951.02/ Noof shares outstanding  

Shares outstanding not given.

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