Constant-growth ratesOne 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 $18.75.•The company’s stock is expected to pay a year-end dividend of $0.90 that is expected to grow at a certain rate.•The stock’s expected rate of return is 9.00%. Based on the information just given, what will be Robert’s forecast of PAMC’s growth rate?3.49% 4.20% 6.30% 8.95% Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant?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. Retaining a higher percentage of earnings will result in a lower growth rate.

The expected return is the minimum required rate of return which an investor required from the…

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International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter18: Long-term Debt Financing

Section: Chapter Questions

Problem 2IEE

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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 $18.75.
•	The company’s stock is expected to pay a year-end dividend of $0.90 that is expected to grow at a certain rate.
•	The stock’s expected rate of return is 9.00%.

Based on the information just given, what will be Robert’s forecast of PAMC’s growth rate?

3.49%

4.20%

6.30%

8.95%

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

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.

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

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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