Halliford Corporation expects to have earnings this coming year of $2.908 per share. Halliford plans to retain all of its earnings for the next two years. Then, for the subsequent two years, the firm will retain 51% of its earnings. It will retain 20% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 20.8% 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? determine the present value of the expected dividends. Year 0 1 2 3 5 6 20.8% 20.8% 10.608% 10.608% 4.160% EPS growth rate (versus prior year) EPS Retention ratio Dividend payout ratio Dividends $4.694 51% $5.408 20% $2.908 $3.513 $4.244 100% 100% 51% 0% 0% 49% $0.00 $0.00 $2.080 $5.192 20% 80% $4.154 49% 80% $2.300 $4.326 on, From year 5 dividends grow at constant rate of 4.160%. Therefore the following formula should be used, Divs PVAT re -9 The stock price can be found using the following formula for the present value: Po = PVO = Div3 Div4 + PV4 (1+r) 3 (1+re)4 + 3