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7. 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 $21.25. The company has forecasted net income and book value of equity for the coming year to be $1,341,300 and $10,497,500, respectively. The company has also been paying dividends for the past eight years and has maintained a dividend payout ratio of 42.500000%. Based on this information, Robert's forecast of PAMC's growth rate in earnings and dividends should be: Based on this information, Robert's forecast of PAMC's growth rate in earnings and dividends should be: O 7.35% O 28.75% 8.15% O 27.16% Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant? O Long-run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company. O Growth in earnings requires growth in dividends. O Retaining a higher percentage of earnings will result in a higher growth rate. As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.44 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 3.20% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Dividends one year from now (D) Horizon value (P) Intrinsic value of Portman's stock The risk-free rate (TRF) is 4.00%, the market risk premium (RPM) is 4.80%, and Portman's beta is 1.30. Value What is the expected dividend yield for Portman's stock today? O 7.06% Co The risk-free rate (TRF) is 4.00%, the market risk premium (RPM) is 4.80%, and Portman's beta is 1.30. What is the expected dividend yield for Portman's stock today? 7.06% O 5.65% O 6.84% O 7.54%