oDert Glman, an equity researcn analyst at Glliman AdvIsors, Delleves in emcient

Question

oDert Glman, an equity researcn analyst at Glliman AdvIsors, Delleves in emcient markets. He nas 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 $23.75 The company's stock is expected to pay a year-end dividend of $1.14 that is expected to grow at a certain rate. The stock's expected rate of return is 11.40%. Based on the information just given, what will be Robert's forecast of PAMC's growth rate? o 5.48% o 11.35% o 9.90% o 6.60% Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant? All else being equal, growth in dividends requires growth in earnings. O Retaining a higher percentage of earnings will result in a lower growth rate. O Long-run earnings growth will decrease when firms retain earnings and reinvest them in the business.

Explanation / Answer

D.6.6%

as per dividend growth model

P = D1 / (k - g)

here,

P = $23.75

D1 = next dividend =>$1.14.

k = required rate =>11.40% =>0.1140

g= growth rate=>to be found out

now<

$23.75 = $1.14 / (0.1140 - g)

=>0.1140 - g => 0.048.

=>g = 0.1140 - 0.048

=>0.066

=>6.6%.

2nd part

All else being equal , growth in dividends requires growth in earnings.

(this is because dividends are paid after retaining the retention ratio of earnings and investing them at internal equity rate of return).

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