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 Asis Minin Co.
Robert has the following information available.

Pan Asis Minin co. stock is trading at $23.75

The company's stock is expected to apy a year-end divfident of $1.14 that is expected to grow at a certain reat.

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?

a. 6.60% b.11.35 c. 5.48% d. 9.90%

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

a. growth in earning requires in dividends.

b. long-run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company

c. retaining a higher percentage of earning will result in a higher growth rate.

Answer 1

Answer:

Q1) a. 6.60%

Q2) c. retaining a higher percentage of earning will result in a higher growth rate.

Explanation:

Q1.)

Use dividend discount model (DDM) to solve for the growth rate;

g = r- (D1/P0)

whereby;

g = dividend growth rate

r = required rate of return = 11.40% or 0.1140 as a decimal

D1 = next year's dividend = $1.14

P0 = Current stock price = $23.75

g = 0.1140 - (1.14/23.75)

g = 0.1140 - 0.048

g = 0.066 or 6.6%

Therefore, the growth rate is 6.60%, making choice A correct.

Q2.)

c. Retained earning is the proportion of total net profit that a company reinvests back into the business for the purpose of investing in other potentially profitable projects.The returns from these projects would increase the value of the company at a faster rate if a higher percentage e.g 90% is retained. On the other hand, if the company pays a larger portion of its retained earnings e.g 70% as dividends, it will experience a slower growth rate making choice C correct.