Robert Gillman, an equity research analyst at Gillman Advisors, believes in effi

Question

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 is trading at $12.50

* The company's stock is expected to pay a year-end dividend of $0.60 that is expected to grow at a certain rate.

* the stock's expected capital gains yield is 1.20%

1. Based on this information, Robert's forecast of PAMC's growth rate of earning and dividends should be:

a. 1.80%

b. 5.95%

c. 1.20 %

d. 1.00%

2. Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant?

a. Long-run earnings growth will decrease when firms retain earnings and reinvest them in the business.

b. Retaining a higher percentage of earnings will result in a lower growth rate.

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

Explanation / Answer

1) Growth rate of earnings and dividend will be also 1.20% since capital gain yield is 1.20% 2) c. All else being equal, growth in dividends requires growth in earnings. Since when the earnings will grow and firm will reinvest earnings in business dividends will also grow. If we retain higher percentage of earnings then growth rate will be higher.

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