Halliford Corporation expects to have earnings this coming year of $3.000 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 return of 25.0% 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 10.0%, what price would you estimate for Halliford stock?

Halliford Corporation expects to have earnings this coming year of $3.000 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 return of 25.0% 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 10.0%, what price would you estimate for Halliford stock?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 22P

See similar textbooks

Similar questions

Towson Industries is considering an investment of $256,950 that is expected to generate returns of $90,000 per year for each of the next four years. What Is the Investments internal rate of return?
Nelly Enterprises will have earnings per share of $3.5 for the coming year. Nelly plans to retain all its earnings for the next four years. For the subsequent three years, the firm plans on retaining 50% of its earnings .Retained earnings will be invested in projects with expected return of 15% per year for the first seven years. It will then retain only 25% of its earnings for the next three years and retained earnings will be invested in projects with an expected return of 20% per year. After that Nelly will retain only 15% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 12% per year. If Nelly's equity cost of capital is 10%, then what is the price of a share of Nelly's stock?
Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $1.6 million. Its depreciation and capital expenditures will both be $301,000, and it expects its capital expenditures to always equal its depreciation. Its working capital will increase by $47,000 over the next year. Its tax rate is 30%. If its WACC is 8% and its FCFs are expected to increase at 5% per year in perpetuity, what is its enterprise value?
Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $2.1 million. Its depreciation and capital expenditures will both be $286,000, and it expects its capital expenditures to always equal its depreciation. Its working capital will increase by $47,000 over the next year. Its tax rate is 35%. If its WACC is 10% and its FCFs are expected to increase at 5% per year in perpetuity, what is its enterprise value? The company's enterprise value is $ (Round to the nearest dollar.)
Matt’s Manufacturing, Inc. expects to earn $45 million per year in perpetuity if it does not undertake any new projects. However, the firm has an investment opportunity that will generate annual earnings of $10 million in perpetuity, beginning two years from today. This investment has an initial (upfront) cost of $10 million today and $5 million next year. The firm has 10 million shares of common stock outstanding, and the required rate of return on the stock is 10% percent. What is the stock price per share if the firm undertakes the investment?
Crazytown Motors is expected to have an EBIT of $680,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $45,000, $9,000, and $40,000, respectively. All cash flow items are expected to grow at 6 percent per year for two years. After Year 3, the CFA is expected to grow at 3 percent indefinitely. The company currently has $3 million in debt and 250,000 shares outstanding. The company's WACC is 9.5 percent and the tax rate is 20 percent. What is the present value of terminal value? Show your steps. What is the price per share of the company's stock? Show your steps.
The Podrasky Corporation is considering a $250 million expansion (capital expenditure) program next year. The company currently has $400 million in net fixed assets on its books. Next year, the company expects to earn $90 million after interest and taxes. The company also expects to maintain its present level of dividends, which is $10 million. If the expansion program is accepted, the company expects its inventory and accounts receivable each to increase by approximately $10 million next year. Long-term debt retirement obligations total $10 million for next year, and depreciation is expected to be $75 million. The company does not expect to sell any fixed assets next year. The company maintains a cash balance of $2 million, which is sufficient for its present operations. If the expansion is accepted, the company feels it should increase its year-end cash balance to $10 million because of the increased level of activities. For planning purposes, assume no other cash flow changes for…
Crarytown Motors is expected to have an EBIT of $680,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $45,000, $9,000, and $40,000respectively. All cash flow items are expected to grow at 6 percent per year for two years. After Year 3, the CFA is expected to grow at 3 percent indefinitely. The company currently has $3.5 million in debt and 250,000 shares outstanding The company's WACC is 9.5 percent and the tax rate is 20 percent. What is the present value of terminal value? Show your steps.
Golf Ball Inc. expects earnings to be $10,000 per year in perpetuity if it pays out all of its earnings in dividends. Suppose the firm has an opportunity to invest $1,000 of next year's earnings to upgrade its machinery. It is expected that this upgrade will increase earnings in all future years (starting two years from now) by $140. Assume that Golf Ball's next dividend is one year from now. The required rate of return is 12%. What is the value of Golf Ball Inc. if it undertakes the upgrade?
The management of Amex Corp. plans to meet a future capital expenditure by depositing $25,000 into a savings account. Annually thereafter, for 15 years, the firm intends to increase this annual savings amount by 5%. The account is expected to earn 8% interest annually. Required: Compute the value of Amex’s investment today.
Jasper Corp. is considering the introduction of a new product that would require investments of $425,000, $200,000 and $160,000 at the end of each of the next three years, respectively. The annual profit expected from the new product is forecast to be $90,000 for Years 1 to 5, and $110,000 for Years 6 to 10. The company’s cost of capital is 6.5% compounded annually.a) What is the NPV of the proposed product? (Negative values should be indicated by a minus sign. Do not round your intermediate calculations. Round your final answer to 2 decimal places.)NPV $ b) Should Jasper Inc. introduce the new product?
XYZ Corporation is considering an expansion project that will produce $90,000 worth of annual operating cash flows for the next four years. During the life of this project, the firm’s CFO expects inventory to increase by $35,000 and also expects accounts receivable to decrease by $10,000. The CFO believes that accounts payable will increase by $20,000. At the end of the project (year 4), the CFO assumes that net working capital will return to its normal level. The project requires the purchase of machinery at an initial cost of $70,000. Machinery installation costs are $10,000. This machine will be depreciated straight-line to a zero book value over the life of the project, but can be salvaged at the end of the project (year 4) creating a $30,000 before-tax cash flow. The company also owns land that will be used for the purpose of this expansion project. Luckily, the company bought this land pre-COVID, 3 years ago for only $25,000. At the time of purchase, the company paid $6,000 to…