Question

**7. 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 $21.25. |

• | The company has forecasted net income and book value of equity for the coming year to be $1,341,300 and $10,497,500, respectively. |

• | The company has also been paying dividends for the past eight years and has maintained a dividend payout ratio of 42.500000%. |

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

8.15%

28.75%

7.35%

27.16%

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

Growth in earnings requires growth in dividends.

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

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

Answer #1

**Robert's forecast of PAMC's growth
rate in earnings and dividends**

Return n Equity (ROE) = [Net Income / Total Equity] x 100

= [$1,341,300 / $10,497,500] x 100

= $12.78%

Therefore, the growth rate in earnings and dividends = Return on Equity x Retention ratio

= Return on Equity x (1 – Dividend payout ratio)

= 12.78% x (1 – 0.4250)

= 12.78% x 0.5750

= 7.35%

Therefore, the Robert's forecast of PAMC's growth rate in earnings and dividends will be 7.35%”

**The correct statements which describes
the relationship between earnings and dividends when all other
factors are held constant is as follows;**

**Option-III**,
The Long-run earnings growth occurs primarily because firms pay
dividends to reward their shareholders for investing in the
company.

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
$16.25.
•
The company has forecasted net income and book value of equity
for the coming year to be $1,025,700...

5 & 7
5. Problem 9.11 (Valuation of a Constant Growth
Stock)
A stock is expected to pay a dividend of $1.00 at the end of the
year (i.e., D1 = $1.00), and it should continue to grow
at a constant rate of 6% a year. If its required return is 15%,
what is the stock's expected price 1 year from today? Do not round
intermediate calculations. Round your answer to the nearest
cent.
$
7. Problem 9.14 (Nonconstant Growth)
Computech Corporation...

The constant growth valuation formula has dividends in the
numerator. Dividends are divided by the difference between the
required return and dividend growth rate as follows:
Pˆ0P̂0
= =
D1(rs – g)D1(rs – g)
Which of the following statements is true?
a- Increasing dividends will always decrease the stock price,
because the firm is depleting internal funding resources.
b- Increasing dividends may not always increase the stock price,
because less earnings may be invested back into the firm and that
impedes...

Expected returns, dividends, and growth
The constant growth valuation formula has dividends in the
numerator. Dividends are divided by the difference between the
required return and dividend growth rate as follows:
P̂0
=
D1/(rs −
gL)
Which of the following statements best describes how a change in
a firm’s stock price would affect a stock’s capital gains
yield?
a.The capital gains yield on a stock that the investor already
owns has an inverse relationship with the firm’s expected future
stock...

*answer is not 10.21%*
roblem 4-7 Calculating Sustainable Growth [LO3]
The most recent financial statements for Schenkel Co. are shown
here:
Income Statement
Balance Sheet
Sales
$
16,800
Current assets
$
12,400
Debt
$
16,900
Costs
10,600
Fixed assets
30,000
Equity
25,500
Taxable income
$
6,200
Total
$
42,400
Total
$
42,400
Taxes (40%)
2,480
Net income
$
3,720
Assets and costs are proportional to sales. Debt and equity are
not. The company maintains a constant 30 percent dividend payout...

Problem 7-13
Nonconstant Growth Stock Valuation
Simpkins Corporation does not pay any dividends because it is
expanding rapidly and needs to retain all of its earnings. However,
investors expect Simpkins to begin paying dividends, with the first
dividend of $1.00 coming 3 years from today. The dividend should
grow rapidly - at a rate of 80% per year - during Years 4 and 5.
After Year 5, the company should grow at a constant rate of 6% per
year. If...

Banyan Co.’s common stock currently sells for $37.75 per share.
The growth rate is a constant 7%, and the company has an expected
dividend yield of 4%. The expected long-run dividend payout ratio
is 30%, and the expected return on equity (ROE) is 10.0%. New stock
can be sold to the public at the current price, but a flotation
cost of 10% would be incurred. What would be the cost of new
equity? Do not round intermediate calculations. Round your...

Banyan Co.’s common stock currently sells for $60.75 per share.
The growth rate is a constant 8%, and the company has an expected
dividend yield of 4%. The expected long-run dividend payout ratio
is 20%, and the expected return on equity (ROE) is 10.0%. New stock
can be sold to the public at the current price, but a flotation
cost of 10% would be incurred. What would be the cost of new
equity? Do not round intermediate calculations. Round your...

Banyan Co.’s common stock currently sells for $57.75 per
share. The growth rate is a constant 5%, and the company has an
expected dividend yield of 5%. The expected long-run dividend
payout ratio is 50%, and the expected return on equity (ROE) is
10.0%. New stock can be sold to the public at the current price,
but a flotation cost of 15% would be incurred. What would be the
cost of new equity? Do not round intermediate calculations. Round
your...

Banyan Co.’s common stock currently sells for $43.75 per share.
The growth rate is a constant 6%, and the company has an expected
dividend yield of 4%. The expected long-run dividend payout ratio
is 25%, and the expected return on equity (ROE) is 7%. New stock
can be sold to the public at the current price, but a flotation
cost of 10% would be incurred. What would be the cost of new
equity? Do not round intermediate calculations. Round your...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 35 minutes ago

asked 55 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago