Question 3 (20 marks)

Hollyford Corporation expects to have earnings this coming year of $3 per share. Hollyford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain 50% of its earnings. It will then retain 20% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 25% per year. Any earnings that are not retained will be paid out as dividends. Assume Hollyford's share count remains constant and all earnings growth comes from the investment of retained earnings. If Hollyford's equity cost of capital is 10%, what price would you estimate for Hollyford stock?

Answer rating: 100% (QA)

Introduction To estimate the price of Hollyford Corporation stock we need to employ the dividend discount model DDM since the company pays dividends a... View the full answer