7. Constant-growth rates

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.

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 $22.50.
	The companys stock is expected to pay a year-end dividend of $1.08 that is expected to grow at a certain rate.
	The stocks expected rate of return is 10.80%.

1. Based on the information just given, what will be Roberts forecast of PAMCs growth rate?

A. 10.75%

B 6.00%

C 9.00%

D 4.98%

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

A. Long-run earnings growth occurs primarily because firms retain earnings and reinvest them in the business.

B. Paying a higher percentage of earnings as dividends will result in a higher growth rate.

D. Dividend growth and earnings growth are unrelated.