Halliford Corporation expects to have earnings this coming year of $3.21 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain 53% of its earnings. It will then retain 17% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 24.37% 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 11.2%, what price would you estimate for Halliford stock? Note: Remenber that growth rate is computed as: retention rate×rate of return.
Halliford Corporation expects to have earnings this coming year of $3.21 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain 53% of its earnings. It will then retain 17% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 24.37% 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 11.2%, what price would you estimate for Halliford stock? Note: Remenber that growth rate is computed as: retention rate×rate of return.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Halliford Corporation expects to have earnings this coming year of
retained earnings will be invested in new projects with an expected return of
$3.21
per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain
53%
of its earnings. It will then retain
17%
of its earnings from that point onward. Each year, 24.37%
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
11.2%,
what price would you estimate for Halliford stock?Note:
Remenber that growth rate is computed as: retention
rate×rate
of return.Expert Solution
Step 1: Introduction
When the company receives profits and distributes them among the shareholders. That share of profit that is distributed among the shareholders, is known as a dividend. There are various types of dividends like stock dividends, scrip dividends, cash dividends, etc.
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