Question

(Common stock valuation) Dalton Inc. has a return on equity of 12.6 percent and retains 54 percent of its earnings for reinvestment purposes. It recently paid a dividend of $3.25 and the stock is currently selling for $42. a. What is the growth rate for Dalton Inc.? b. What is the expected return for Dalton's stock? c. If you require a 13 percent return, should you invest in the firm? a. What is the growth rate for Dalton Inc.? % (Round to two decimal places.) b. What is the expected return for Dalton's stock? % (Round to two decimal places.) c. If you require a 13 percent return, should you invest in the firm? (Select from the drop-down menu.

Answer 1

Hello Sir/ Mam

(a)

Growth Rate = RoE * Retention Ratio = 12.6%*54% = 6.8%

(b)

Ke = (D1/P0) + g = ($3.27/$42) + 6.8% = 15.07%

(c)

Yes, as the rate of return of the firm is more than 13%, I'll invest.

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