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 (Ticker: PAMC) is trading at $15.00. • The company’s stock is expected to pay a year-end dividend of $0.72 that is expected to grow at a certain rate. • The stock’s expected rate of return is 7.20%. Based on the information just given, what will be Robert’s forecast of PAMC’s growth rate?

Answer 1

Answer:

Growth rate = g = 7.152%

Explanation:

To calculate the Robert forecast of the PAMC's growth rate in the question, we are give the following values

Share market value(MV)=$15

The stock's expected rate of return(Ke)=7.2%

Dividend at end of the year (D)=$0.72

Using the this formula, we can find the growth rate by making g the subject of formula in this formula

MV=D1/(Ke-g)

Substituting the values we have

15 = 0.72/(7.2-g)

15(7.2-g) = 0.72

108 - 15g = 0.72

Rearranging and collecting like terms, we have

108 - 0.72 = 15g

107.28 = 15g

Making g the subject of formula by dividing both sides by 15 we have

g= 7.152%

Answer 2

Answer:

Growth rate 2.4%

Explanation:

MV=D1/(Ke-g)

Where MV=share market value=$15

D1=Dividend at year end=$.72

Ke=stock's expected rate of return=7.2%

By putting above values in formula, we get;

MV=D1/(Ke-g)

15=.72/(7.2%-g)

15*7.2%-15g=.72

1.08-15g=.72

.72-1.08=-15g

g= -.36/-15

g=2.4%