Dalton, Inc
Dalton, Inc. has an 11.5 percent return on equity and retains 55 percent of its earnings for reinvestment purposes. It recently paid a dividend of $3.25 and the stock is currently selling for $40.
a. what is the growth rate of Dalton, Inc?
Growth rate = return on equity x retention rate
= .115 x 0.55 = 0.0633 or 6.335
b. what is the expected return for Dalton's stock
Expected rate of return = + growth rate
= [pic]+ 0.0633 = 01496 or 14.96%
c. if you require a 13 percent return, should you invest in the firm?
Since the stock has an expected rate of return of 14.96 percent, which is greater than the 13-percent required rate of return, I should invest.
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