Problem 7-21 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. Then, for the subsequent two years, the firm will retain 50% 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 retum 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? Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. S Earnings per share Retention period (years) Retention rate (1) Retention rate (2) Expected return Equity cost of capital 3.00 2 50% 20% 25% 10% 1 4 15 25% 25% 12.5% 12.5% 5% 16 Yea: Earnings EPS growth rate (vs. prior year) EPS Dividends Retention rate Dividend payout ratio Dividends 100% 100% 50% 50% 20% 20% Year 5 value of dividends after year 5 Stock price 26 Requirements 27 1 In cell range D16:116, by using cell references, calculate the earnings per share for years 1:6, respectively (1 pt.). 28 2 In cell range D19:119, by using cell references, calculate the dividend payout ratios for years 1:6, respectively (1 pt.). 29 In cell range D20:120, by using cell references, calculate the dividends for years 1:6, respectively (1 pt.). 30 4 In cell D22, by using cell references, calculate the present value in Year 5 of the dividends after year 5 (1 pt.). 31 5 In cell D23, by using cell references, calculate the price of the stock today (1 pt.). 32 3