Common stock valuation Dalton Inc has a return on equity of

(Common stock valuation) Dalton Inc. has a return on equity of 13.2 percent and retains 54 percent of its earnings for reinvestment purposes. It recently paid a dividend of $3.50 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 12 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 12 percent return, should you invest in the firm?V(Select from the drop-down menu.)

Solution

growth rate = ROE * retention rate

= 13.2% * 54% = 7.13%

Expected retrun = dividend/stock price + growth rate

= 3.5/42 + 7.13%

= 15.46%

Yes I will invest in the firm since expected return is more than required return.