Question

Martell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 7% per year. If D0 = $2 and rs = 18%-----What is the value of Martell Mining's stock?

Answer 1

The earnings and dividends of the company are declining at the constant rate of 7% per year. Do is given as $2 and r, is 18%. The value of the stock can be calculated using the following formula: Do x(1+g) o k,-8 Here Current price of the stock is Po Current dividend is D Growth rate is g Rate of return is k Calculate the value of the stock as follows: o k,-8 $2x(1+(-790)) 8%-(-7%) $1.86 25% -$7.44 Thus, the value of the stock is $7.44.