Question
Constant growth rates One of the most important components of stock valuation is a firm’s estimated...
Constant growth rates
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 $16.25. |
| • | The company’s stock is expected to pay a year-end dividend of $0.78 that is expected to grow at a certain rate. |
| • | The stock’s expected rate of return is 7.80%. |
Based on the information just given, what will be Robert’s forecast of PAMC’s growth rate?
3.00%
2.49%
4.50%
7.75%
Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant?
Long-run earnings growth will decrease when firms retain earnings and reinvest them in the business.
Retaining a higher percentage of earnings will result in a lower growth rate.
All else being equal, growth in dividends requires growth in earnings.
Answers
Stock Price = Expected Dividend/(Required return – growth rate)
16.25 = 0.78/(7.80%- growth rate)
Growth rate = 3%
Hence, the forecasted growth rate = 3.00%
Growth rate = Return on Equity*Retention rate
Hence, the correct statement is
All else being equal, growth in dividends requires growth in earnings.
Retaining a higher percentage will lead to a higher growth rate
Similar Solved Questions
1 answers
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $595,200 is estimated to result in $198,400 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the en...
1 answers
Wendell's Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine...
Wendell's Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,200 per year. In addition, the new machine would allow the company to produce one new style ...
1 answers
Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1,000,000...
Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1,000,000 in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year’s operations of the two firm...
1 answers
Air is a gas mixture, and consists of approximately 78% nitrogen and 21% oxygen. Calculate the...
Air is a gas mixture, and consists of approximately 78% nitrogen and 21% oxygen. Calculate the mass concentrations of the gas species at standard ambient temperature and pressure....
1 answers
Python Language Only!!!! Python Language Only!!!! Python Language Only!!!! Python 3 is used. Write a Python...
Python Language Only!!!! Python Language Only!!!! Python Language Only!!!! Python 3 is used. Write a Python statement that creates a two-dimensional list named values with 3 rows and 2 columns. Then write nested loops that get an integer value from the user for each element in the list. Then display...
1 answers
Cise 0 le Copy Center had the transactions listed below during the month of June. RANSACTIONS...
cise 0 le Copy Center had the transactions listed below during the month of June. RANSACTIONS 1. John Amos started the business with a cash investment of $47.000. 2. Purchased equipment for $15,500 on credit. 3. Performed services for $3,400 in cash. 4. Purchased additional equipment for $3,300 in c...
1 answers
A spring mass system completes 4 oscillations in 8 seconds. if the mass is 20 kg...
a spring mass system completes 4 oscillations in 8 seconds. if the mass is 20 kg what is the spring constant...
1 answers
(a) The Latimer diagram for europium in acidie solution is as follows: -0.35 2.80 chemist wants...
(a) The Latimer diagram for europium in acidie solution is as follows: -0.35 2.80 chemist wants to prepare an Eu solution. As a starting material he has a colourless acidic solution of Eu and two possible reducing agents: Zn turnings (Zn2+/Zn -0.76V) and a solution of stannous chloride (Sn/Sn2 0.15)...
1 answers
Problem 3) Consider a string with L = 0.50 m and with wave propagation speed v...
Problem 3) Consider a string with L = 0.50 m and with wave propagation speed v = 150 m/s. a) What are the frequency f5 and wavelength 15 of the fifth mode? b) Please also find the wavelength in air of the sound produced, and explain why it is different. HINT: In air, the wavelength is roughly human ...
1 answers
Consider this reaction: tempe CHOWE HY CH2OH - + Br—Br H3C01 The mechanism proceeds through a...
Consider this reaction: tempe CHOWE HY CH2OH - + Br—Br H3C01 The mechanism proceeds through a first cationic intermediate, intermediate 1. Nucleophilic attack leads to intermediate 2, which goes on to form the final product. In cases that involve a negatively charged nucleophile, the attack of...
1 answers
Question 31 (1 point) A systems analysis includes a feasibility study that is used to determine...
Question 31 (1 point) A systems analysis includes a feasibility study that is used to determine whether the solution is achievable. This includes - and technical feasibility, economic feasibility, operational feasibility, schedule feasibility technical feasibility, economic feasibility, operational ...
1 answers
M. Lowenthal You are to use Linked Lists to do this program The "XYZ Widget Store...
M. Lowenthal You are to use Linked Lists to do this program The "XYZ Widget Store receivee shipments of widgots at varlous oosts. The store's polcy isto charge a 30% markup, and to sol widgets which were received earlier before widgets whic were received lator. This is called a First In Firs...
1 answers
Please show all work and formulas used to solve. Thank you for your help. Calculate the...
Please show all work and formulas used to solve. Thank you for your help. Calculate the moment of inertia of the composite area below about: a) The x- and y-axes shown (Ix and ly). b) Thex- and y-axes through the centroid of the area (Ix and Iy). 160 40 mm 40 EMm 40 mm 120...
1 answers
Based on a Comcast survey, there is a 0.8 probability that a randomly selected adult will...
Based on a Comcast survey, there is a 0.8 probability that a randomly selected adult will watch prime-time TV live, instead of online, on DVR, etc. Assume that seven adults are randomly selected. Find the probability that fewer than three of the selected adults watch prime-time live. O A. 0.00430 OB...
1 answers
Please let it be legible, thanks in advance Hw 3 P 5 Review i Constants The...
Please let it be legible, thanks in advance Hw 3 P 5 Review i Constants The two ropes shown in the bird's-eye view of (Figure 1) are used to drag a crate 3.5 m across the floor. Part A Figure How much work is done by the force ? Express your answer with the appropriate units. 1 of 1 H&Ari...
1 answers
Determine all possible values of 0, in radians, for 0 multiples of rt: 2 aner 8....
Determine all possible values of 0, in radians, for 0 multiples of rt: 2 aner 8. s 0 2r. Express your answer in rational a, sinθ=- V2 cosに- b, N3 2/3...