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% 6.30% 8.95% 4.20% Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant? a. Growth in earnings requires growth in dividends. b. Long-run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company. c. Retaining a higher percentage of earnings will result in a higher growth rate.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
| • | 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 |
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
