1 answer

Halliford Corporation expects to have earnings this coming year of $ 2.82 per share. Halliford plans...

Question:

Halliford Corporation expects to have earnings this coming year of $ 2.82 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain 51 % of its earnings. It will then retain 23 % of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 19.55 % per year. Any earnings that are not retained will be paid out as dividends. Assume​ Halliford's share count remains constant and all earnings growth comes from the investment of retained earnings. If​ Halliford's equity cost of capital is 9.6 %​, what price would you estimate for Halliford​ stock? ​Note: Remenber that growth rate is computed​ as: retention rate times rate of return.

Thank you!


Answers

ROE= 19.55% Required rate= 9.60% Long term ret. Rate= 23.00%
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% 19.550% 2.82 0 0 1.096 0
2 2.82 100.00% 19.550% 3.37131 0 0 1.201216 0
3 3.37131 51.00% 9.971% 3.707446464 1.816648767 1.816648767 1.316533 1.379874
4 3.707446464 51.00% 9.971% 4.077097413 1.997777732 40.90541409 42.90319182 1.44292 29.73359
Long term growth rate = =ROE*long term ret. Rate= 4.497% Value of stock = Sum of discounted values= 31.11
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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