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 $$16\mathrm{.}25.$

The company has forecasted net income and book value of equity for the coming year to be $$1,025,700$ and $$8,027,500,$

respectively.

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

$32\mathrm{.}500000\%.$

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

$6\mathrm{.}23\%$

$20\mathrm{.}77\%$

$15\mathrm{.}98\%$

$8\mathrm{.}62\%$

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

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

Dividend growth and earnings growth are unrelated.

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