Frum Cengage Assignment 09-Stocks and Their Valuation 7. Constant-growth rates a

Question

Frum Cengage Assignment 09-Stocks and Their Valuation 7. Constant-growth rates a AaE 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 $20.00. The company's stock is expected to pay a year-end dividend of $0.96 that is expected to grow at a certain rate The stock's expected rate of return is 9.60%. 4516. Based on the information just given, what will be Robert's forecast of PAMC' growth rate? 4.80% Q 3.98% 7.20% 9.55% 415

Explanation / Answer

1.

Current Stock Price = $20

Expected dividend = $0.96

Required rate of return = 9.60%

Constant Growth rate = Required rate of return - (Expected dividend / Current Stock Price)

= 9.60% - ($0.96 / $20)

= 9.60% - 4.80%

= 4.80%

Constant Growth rate in dividend will be 4.80%.

Option (A) is correct answer.

b.

Growth rate dividend is calculated by return on equity multiplied by Retention ratio. So, as retention ratio that is percentage of retained earning as percentage of net income increases then growth rate in dividend also must be increases.

Option (A) is correct answer.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.