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: O Pan Asia Mining Co.’s stock (Ticker: PAMC) is trading at $22.50.O 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.O The company has also been paying dividends for the past eight years and has maintained a dividend payout ratio of 45.0%. A) Based on this information, Robert’s forecast of PAMC’s growth rate in earnings and dividends should be: a. 7.03% b. 31.95% c. 28.75% d. 8.62%

Answer 1

Answer:

a. 7.03%

Explanation:

We need to solve for the rate of sustainable growth which is the amount of growth without chanign the capital structure of the company

ROE ( 1 - dividend payout) = sustainable growth

ROE income / equity = 1,420,00 / 11,115,000 = 0.127755285

0.127755285 ( 1 - 0.45) = 0.0702654 = 7.03%