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 Company. Robert has the following information available: Pan Asia Mining Company's stock (Ticker: PAMC) is trading at $13.75. The company's stock is expected to pay a year-end dividend of $0.66 that is expected to grow at a certain rate. The stock's expected rate of return is 6.60%. Based on the information just given, what will be Robert's forecast of PAMC's growth rate? 2.70% O 6.55% 0.01% O 1.80% Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant? 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. All else being equal, growth in dividends requires growth in earnings. 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 $1.92 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. (Note: Do not round your intermediate calculations.) Term Value Dividends one year from now (D1) Horizon value (Pi) Intrinsic value of Portman's stock (Note: Rounded to four decimal places) (Note: Rounded to two decimal places) (Note: Rounded to two decimal places) The risk-free rate (TRF) is 4.00%, the market risk premium (RPM) is 4.80%, and Portman's beta is 2.00. Assuming that the market is in equilibrium, use the information just given to complete the table. What is the expected dividend yield for Portman's stock today? 8.32% 10.40% O 10.08% 11.45% Now let's apply the results of your calculations to the following situation: Portman has 1,000,000 shares outstanding, and Judy Davis, an investor, holds 15,000 shares at the current price (computed above). Suppose Portman is considering issuing 125,000 new shares at a price of $18.20 per share. If the new shares are sold to outside investors, by how much will Judy's investment in Portman Industries be diluted on a per-share basis? $0.44 per share $0.31 per share $0.76 per share $0.36 per share Thus, Judy's investment will be diluted, and Judy will experience a total of
