(Common stock valuation) Dalton Inc. has a return on equity of 10.5 percent and
ID: 2804003 • Letter: #
Question
(Common stock valuation) Dalton Inc. has a return on equity of 10.5 percent and retains 57 percent of its earnings for reinvestment purposes. It recently paid a dividend of $2.75 and the stock is currently selling for $40. a. What is the growth rate for Dalton Inc.? b. What is the expected return for Dalton's stock? 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? | . (Select from the drop-down menu.) Yes NoExplanation / Answer
a)
Growthr rate = ROE * retention ratio = 10.5% * 57% = 5.985%
b)
R = (D*(1+g) / Price) + g = 2.75*(1+5.985%) / 40 + 5.985% = 13.27%
c)
Yes, As R(13.27%) is greater than 12%
2)
Total return = dividend yield + capital gain
17% = 6.25/51+ x / 51
x = 17%*51 - 6.25 = 2.42
in % terms = 2.42/51 = 4.75%
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