HOW DOES ONE GET THE EPS AND THE DIVIDENDS

How

i View an Example Question Help Halliford Corporation expects to have earnings this coming year of $2.60 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain 45% 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 22.96% 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 9.2%, what price would you estimate for Halliford stock? Note: Remenber that growth rate is computed as: retention rate x rate of return. The price per share can be computed as the present value of all future dividends. The following table helps explain the dividend forecast for Halliford: 22.96% $3.20 22.96% $3.93 10.33% $4.34 10.33% $4.79 5.28% $5.04 $2.60 Year Earnings 1 EPS growth rate 2 EPS Dividends 3 Retention ratio 4 Dividend payout ratio 5 Dividends 100% 100% 0% 0% 45% 55% $2.16 45% 55% $2.39 23% 77% $3.69 23% 77% $3.88 $0.00 $0.00 From year six on, dividends grow at a constant rate of 5.28%. Therefore, DiVG P5 $3.88 0.092 -0.0528 = $98.98 Then, Diva Diva (Divg +P5) (1+re) 3 (1+r) (1+r)5 $2.16 $2.39 ($3.69 + $98.98) -= $69.46 (1 +0.092) 3 (1 +0.092)4 (1 +0.092)5 0 Question is complete. All parts showing Close