7. Constant-growth rates Aa Aa One of the most important components of stock val

Question

7. Constant-growth rates Aa Aa One of the most important components of stock valuation is a firm's estimated growth 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 $25.00 The company has forecasted net income and book value of equity for the coming year to be $1,578,000 and $12,350,000, respectively. The company has also been paying dividends for the past 8 years and has maintained a dividend payout ratio of 50.00%.

Explanation / Answer

1.

return on equity=1578000/12350000=12.78%

growth rate=return on equity*retention ratio

=return on equity*(1-dividends payout ratio)

=12.78%*(1-50%)

=6.39%

2).

all else being equal, growth in divideds requires growth in earning.

the above is the answer

because dividend are paid from earnings.

the above are the answers

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