Halford Corporation expects to have earnings this coming yea

Halford Corporation expects to have earnings this coming year of $2.892 per share. Halliford plans to retain all of its earnings for the next two years. Then, for the subsequent two years, the firm w I retain 49% of its earnings. It will retain 19% of its earnings from that point onward. Each year, retained earnings ill be invested in new projects with an expected return o 22.9% per year. Any earnings that are not retained will be paid out as di dends. Assume Hall ford\'s share count remains constant and all eamings growth comes om he investment o retained earnings f Ha d\'s equity cost o capital is 8.9%, what price would you estimate for Halliford stock? The stock price will be $ (Round to the nearest cent.)

Solution

From year 5 on, dividends grow at constant rate of 4.35%. Therefore,

P(5) = 4.567/(8.9% –4.35%) = $100.37

Then P(0) = 2.28 / 1.089³+ 2.478 / 1.095⁴+ (4.377+100.37) / 1.095⁵

= $71.88

	Year	0	1	2	3	4	5	6
	Earnings
1	EPS Growth rate (Vs. Prior yr)			22.90%	22.90%	11.22%	11.22%	4.35%
2	EPS		2.892	3.554	4.368	4.858	5.403	5.638
	Dividends
3	Retention Ratio		100%	100%	49%	49%	19%	19%
4	Dividend Payout Ratio		0	0	51%	51%	81%	81%
5	Div (2 *4)		0	0	2.228	2.478	4.377	4.567