6. Constant-growth rates

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One of the most important components of stock valuation is a firms estimated growth rate. Financial statements provide the information needed to estimate the growth rate.

Sam Cho, an equity research analyst at Cho 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.

Sam has the following information available:

	Pan Asia Mining Cos stock (Ticker: PAMC) is trading at 22.50 per share.
	The companys stock is expected to pay a year-end dividend of $1.08 that is expected to grow at a certaincurrently unknownrate.
	The stocks expected rate of return is 10.80%.

Based on the information just given, Sams forecast of PAMCs growth rate should be selector 1

10.75%

9.00%

6.00%

4.98%

.

Points:

Close Explanation

Explanation:

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

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

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

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