Question

page may not function Correctly. Cick here to learn more. 7. Constant-growth rates Aа Аа One of the most important components of stock valuation is a firm's estimated qrowth rate. Financial statements provide the information needed to estimate the growth rate. Consider this case: Robert Gillman, an equity research analyst at Gillman Advisors, believes in efficient markets. He has been following the mining industry for the past 10 years and needs to determine the constant-growth rate that he should use while valuing Pan Asia Mining Co. Robert has the following information available: Pan Asia Mining Co's stock (Ticker: PAMC) is trading at $13.75 The company's stock is expected to pay a year-end dividend of $0.66 that is expected to grow at a certain rate. . The stock's expected rate of return is 6.60%. Based on the information just given, what will be Robert's forecast of PAMC's growth rate? O 1.49% O 1.80% O 6.55% O 2.70% Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant? O Growth in earnings requires growth in dividends. OLong-run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company. O Retaining a higher percentage of earnings will result in a higher growth rate.

Answer 1

1) Stock Price = Expected Dividend / (Ke - growth rate) $13.75 = $0.66 / (0.066 -growth rate) (0.066 - growth rate) = 0.66/13.75 Growth rate =0.066 - 0.048 = 0.018 i.e. 1.8% 2) Correct option is "C" - Retaining a higher percentage of earnings result in higher growth rate Explanation: The reason is that the growth is achieved by earning return on equity on the retained part of the profit. So the higher the retained earnings, the higher will be the growth.