Question

an equity research analyst at MSU 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.

Alex has the following information available:

• Pan Asia Mining Co,’s (Ticker: PAMC) stock is trading at $22.5
• The company has forecasted net income and book value of equity for the coming year to be $1,420,200 and $11,115,000, respectively.
• The company has also been paying dividends for the past eight years and has maintained a dividend payout ratio of 45%.

Based on this information, Alex’s forecast of PAMC’s growth rate in earnings and dividends should be:

a. 4.97%         b. 7.03%         c. 9.64%         d. 5.68%

Answer 1

Solution - Forecasted Net Income = $1,420,200 Forecasted Book Value of equity : $11,115,000 So, first of all we will calculate Return on equity (ROE). ROE a Net Income x 100 Book value of Equity $1,420,200 $11,115,000 x 100 = 12.777327935 % 02 12.78./. Now, Dividend Payout Ratio has been maintained at a rate of 45% that means Retention Ratio - 1-0 = 1 456% - 55% Retention Ratio of 55% has been maintained for

past 8 years. Based on the information, the forecast of PAME's growth rate in earning and dividend is sustainable Growth Rate which should be y = ROEX Retention Ratio = 12,78% / 55./ ~ 7.029% Og 7.034%. Capprox) so, the right option is (6) 7.03%