Martell MiningCompany\'s ore reserves are being depleted, soits sales are fallin

Question

Martell MiningCompany's ore reserves are being depleted, soits sales are falling. Also, because its pit is getting deeper eachyear, its costs are rising. As a result, the company's earning anddividends are declining at the constante rate of 5% per year. ifD0= $5 and r=15%, what is the value of Martell Mining'sstock? Martell MiningCompany's ore reserves are being depleted, soits sales are falling. Also, because its pit is getting deeper eachyear, its costs are rising. As a result, the company's earning anddividends are declining at the constante rate of 5% per year. ifD0= $5 and r=15%, what is the value of Martell Mining'sstock?

Explanation / Answer

Dividend paid (D0)  = $5 Required Rate of Return (R ) = 15% Dividend growth rate (g) = (-5%) Current Value of Stock (P0) = ? P0 = D1 / (R - g) D1 = D0(1+g) D1 = $5 [1+(-0.05) D1 =$4.75 P0 = $4.75 /[0.15 - (-0.05)] P0 = $4.75 /0.2 Martell'sMining's Current Stock Value(P0) = $23.75 Dividend paid (D0)  = $5 Required Rate of Return (R ) = 15% Dividend growth rate (g) = (-5%) Current Value of Stock (P0) = ? P0 = D1 / (R - g) D1 = D0(1+g) D1 = $5 [1+(-0.05) D1 =$4.75 P0 = $4.75 /[0.15 - (-0.05)] P0 = $4.75 /0.2 Martell'sMining's Current Stock Value(P0) = $23.75

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