Question

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 $22.50.
• The company’s stock is expected to pay a year-end dividend of $1.08 that is expected to grow at a certain rate.
• The stock’s expected rate of return is 10.80%.
Based on this information, Robert's forecast of PAMC's growth rate of earning and dividends should be:__________.

Answer 1

Growth rate in dividend and earnings = 10%

Step-by-step explanation:

The Dividend Valuation Model is a technique used to value the worth of an asset. According to this model, the worth of an asset is the sum of the present values of its future cash flows discounted at the required rate of return.

The model is given as

P = D× g/(r-g)

P- price of stock, g - growth rate in dividend, r- required rate of return

P- 22.50, r- 10.80%, g- ?

22.50 = ( 1.80 ×g)/(0.108-g)

Cross multiplying

22.50 × (0.108 - g) = 1.80 × g

2.43 - 22.50g= 1.80 g

1.80g + 22.50g = 2.43

24.3 g = 2.43

g= 2.43/24.3= 0.1

g = 0.1 × 100 = 10%

Growth rate = 10%