Dalton Inc. has a return on equity of 11.1 percent and retains 54 percent of its
ID: 2804577 • Letter: D
Question
Dalton Inc. has a return on equity of 11.1 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 $ 38.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? Dalton Inc. has a return on equity of 11.1 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 $ 38.
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? Dalton Inc. has a return on equity of 11.1 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 $ 38.
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?
Explanation / Answer
Answer a.
Sustainable growth rate = roe*retention
=0.111*0.54
=0.05994
Thus the growth rate for Dalton Inc. is 5.994%
Answer b.
Expected return on Daltons stock = 3.5/38
=0.0921
=9.21%
Answer C.
If your required return is 13%, you shouldn't invest in the firm
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