7. Constant-growth rates One of the most important components of stock valuation is a firm’s estimated...

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 8 years and has maintained a dividend payout ratio of 42.50%.

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

8.15%

27.16%

28.75%

7.35%

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.

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

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

Expert Solution

jeff jeffy answered 2 hours ago

7. Constant growth rates One of the most important components of stock valuation is a firm’s...

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...

Explain the valuation of constant growtn and super normal growth of stock

Constant Growth Stock Valuation Investors require a 14% rate of return on Brooks Sisters' stock (rs...

Constant Growth Stock Valuation Investors require a 14% rate of return on Brooks Sisters' stock (rs = 14%). What would the estimated value of Brooks' stock be if the previous dividend was D0 = $1.75 and if investors expect dividends to grow at a constant annual rate of (1) - 6%, (2) 0%, (3) 5%, or (4) 10%? Do not round intermediate calculations. Round your answers to the nearest cent. $ $ $ $ Using data from Part a, what...

Constant Growth Valuation Woidtke Manufacturing's stock currently sells for $32 a share. The stock just paid...

Constant Growth Valuation Woidtke Manufacturing's stock currently sells for $32 a share. The stock just paid a dividend of $3.75 a share (i.e., D0 = $3.75), and the dividend is expected to grow forever at a constant rate of 8% a year. What stock price is expected 1 year from now? Round your answer to the nearest cent. $ What is the estimated required rate of return on Woidtke's stock? Do not round intermediate calculations. Round the answer to three...

VALUATION OF A CONSTANT GROWTH STOCK Investors require a 16% rate of return on Levine Company's...

VALUATION OF A CONSTANT GROWTH STOCK Investors require a 16% rate of return on Levine Company's stock (i.e., rs = 16%). What is its value if the previous dividend was D0 = $3.25 and investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 4%, or (4) 11%? Do not round intermediate calculations. Round your answers to two decimal places. (1) $ (2) $ (3) $ (4) $ Using data from part a, what...

Valuation of a constant growth stock Investors require a 15% rate of return on Levine Company's...

Valuation of a constant growth stock Investors require a 15% rate of return on Levine Company's stock (i.e., rs = 15%). What is its value if the previous dividend was D0 = $3.50 and investors expect dividends to grow at a constant annual rate of (1) -3%, (2) 0%, (3) 7%, or (4) 11%? Round your answers to two decimal places. (1) $ (2) $ (3) $ (4) $ Using data from part a, what would the Gordon (constant growth)...

Annuities are one of the most used of the valuation formulas in finance. There are 7...

Annuities are one of the most used of the valuation formulas in finance. There are 7 characteristics or factors that we need to look for when determining the correct formula to use. Name 5 of the characteristics that you need to look for and explain their importance when solving a problem.

Constant Dividend Growth Valuation Crisp Cookware's common stock is expected to pay a dividend of $3...

Constant Dividend Growth Valuation Crisp Cookware's common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 0.9. The risk-free rate is 2.6% and the market risk premium is 5%. The dividend is expected to grow at some constant rate, gL, and the stock currently sells for $80 a share. Assuming the market is in equilibrium, what does the market believe will be the stock's price at...

Problem 9-12 Valuation of a constant growth stock Investors require a 18% rate of return on...

Problem 9-12 Valuation of a constant growth stock Investors require a 18% rate of return on Levine Company's stock (i.e., rs = 18%). What is its value if the previous dividend was D0 = $3.00 and investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 3%, or (4) 11%? Round your answers to two decimal places. (1) $ (2) $ (3) $ (4) $ Using data from part a, what would the Gordon...

. What are the components of a firm’s credit policy, and why are they important?

Question