Halliford Corporation expects to have earnings this coming year of $3.31 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain 52% of its earnings. It will then retain 18% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 21.93%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 8.5%, what price would you estimate for Halliford stock? Note: Remenber that growth rate is computed as: retention rate x rate of return.
Halliford Corporation expects to have earnings this coming year of $3.31 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain 52% of its earnings. It will then retain 18% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 21.93%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 8.5%, what price would you estimate for Halliford stock? Note: Remenber that growth rate is computed as: retention rate x 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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Transcribed Image Text:Halliford Corporation expects to have earnings
this coming year of $3.31 per share. Halliford
plans to retain all of its earnings for the next two
years. For the subsequent two years, the firm
will retain 52% of its earnings. It will then retain
18% of its earnings from that point onward. Each
year, retained earnings will be invested in new
projects with an expected return of 21.93%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 8.5%, what
price would you estimate for Halliford stock?
Note: Remenber that growth rate is computed
as: retention rate × rate of return.
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