Question

Halliford Corporation expects to have earnings this coming year of $3 per share. Halliford 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 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 10%, what price would you estimate for Halliford stock? What are the earnings and dividends over the first three years? At what rate will the earnings and dividends grow in year 4 and 5? What are the dividends at the end of year 4 and 5? What price would you estimate for Halliford stock?

          Halliford Corporation expects to have earnings this coming year of $3 per share. Halliford 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 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 10%, what price would you estimate for Halliford stock? What are the earnings and dividends over the first three years? At what rate will the earnings and dividends grow in year 4 and 5? What are the dividends at the end of year 4 and 5? What price would you estimate for Halliford stock?

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Added by Laura H.

Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

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Solved by Expert Akash M

06/15/2023

Step 1

Earnings for the first three years: - Year 1: $3 (100% retained) - Year 2: $3 * (1 + 0.25) = $3 * 1.25 = $3.75 (100% retained) - Year 3: $3.75 * (1 + 0.25) = $3.75 * 1.25 = $4.6875 (50% retained) Show more…

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Halliford Corporation expects to have earnings this coming year of $3 per share. Halliford 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 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 10%, what price would you estimate for Halliford stock? What are the earnings and dividends over the first three years? At what rate will the earnings and dividends grow in year 4 and 5? What are the dividends at the end of year 4 and 5? What price would you estimate for Halliford stock?

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Transcript

00:01 Here we have to calculate or estimate the price of stock for the heliport corporation.

00:16 For this, we have to determine earning and dividends for each year.

00:22 So, let's discuss one by one.

00:24 When we talk for year 1, so earning per share is equals to 3 dollar and dividend per share is equals to 0 dollar as all retained, all earnings are retained.

00:41 For year 2, earning per share is 3 dollar multiplied by 1 plus 0 .25.

00:56 We got 3 .75 dollar, dividend is 0 dollar as all earnings are retained.

01:09 For year 3, earning per share is equals to 3 .75 dollar multiplied by 1 plus 0 .25.

01:27 So, we got 4 .69 dollar, dividend is equals to 4 .69 dollar multiplied by 0 .5 is equals to 2 .35 dollar we got as 50 percent of earnings retained and remaining as dividend.

01:55 When we talk about the year 4, earning per share is equals to 4 .69 multiplied by 1 plus 0 .25, we got 5 .86 dollar.

02:22 Now, let's talk about the dividend in year 4.

02:32 So, first as given in a question from year 4, 20 percent of earnings will be retained and remaining 80 percent will be paid as dividend.

02:41 So, dividend per share is 5 .86 multiplied by 0 .8.

02:49 So, we got 4 .69 dollar.

02:53 Now, for year 5, earning per share is equals to 5 .86 dollar multiplied by 1 plus 0 .25.

03:10 So, we got 7 .33 dollar.

03:15 When we talk about the dividend, so 7 .33 dollar multiplied by 0 .8, we got 5 .86 dollar.

03:28 Okay.

03:29 So, now to estimate the price of stock, we need to determine the present value of dividends and present value of earnings for each year.

03:40 So, first we calculate present values of dividends.

03:48 Okay...

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