Attempts

$\backslash$table$[[,,]]$ Keep the Highest $/20$

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$.\text{'}$s stock $($Ticker: PAMC$)$ is trading at $$22\mathrm{.}50.$

The company has forecasted net income and book value of equity for the coming year to be $$1,420,200$ and $$11,115,000,$

respectively.

The company has also been paying dividends for the past eight years and has maintained a dividend payout ratio of

$45\mathrm{.}000000\%.$

Based on this information, Robert's forecast of PAMC's growth rate in earnings and dividends should be:

$8\mathrm{.}62\%$

$28\mathrm{.}75\%$

$31\mathrm{.}95\%$

$7\mathrm{.}03\%$

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

Long$-$run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company.

Growth in earnings requires growth in dividends.

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