Dalton inc has an 125 percent return on equity and retains 5

Dalton inc. has an 12.5 percent return on equity and retains 52 percent of its earnings for reinvestment purposes. it recently paid a dividend of $2.75 and the stock is currently selling for $41. a. what is the growth rate for Dalton Inc.? b. what is the expected return for Dalton\'s stock? c. if yo require a 14 percent return, should you invest in the firm?

Solution

a.

Growth rate = Return rate * Retention rate

= 0.125 * 0.52

= 0.065 =6.5 percent

b.

Expected return = (Dividend / Slling price) + Growth rate

=(2.75 / 41) + 0.065

= 0.132 = 13.2 percent

c.

if a 14 percent return is required,

Since the stock has an expected rate of 13.2 percent, which is lessthan the 14 percent required rate of return, I shouldn\'t invest.