Question

Maxwell 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 5% per year. If D0 = $4 and rs = 13%, what is the value of Maxwell Mining's stock? Round your answer to the nearest cent.

Answer 1

Answer:

$21.11

Explanation:

Given that,

Current dividend, D0 = $4

Rate of return, rs = 13%

$P_{0}=\frac{D_{0}\times(1+g) }{rs-g) }$

Here,

Current price of the stock = $P_{0}$

Growth rate, g = 5%

$P_{0}=\frac{4\times(1+(-0.05)) }{0.13-(-0.05)) }$

$P_{0}=\frac{3.8}{0.18}$

               = $21.11

Therefore, the value of stock is $21.11