Question

Brushy Mountain Mining Company's coal reserves are being depleted, so its sales are falling. Also, environmental costs increase each year, so its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 10% per year. If D0 = $2 and rs = 13%, what is the estimated value of Brushy Mountain's stock? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

The estimated value of Brushy Mountain's stock is $41.40

Step-by-step explanation:

For computing the estimated value of stock, we need to apply the formula which is shown below:

= (D0 × (1 +g) ) ÷ (rs - g)

where,

The D0 would be a 0 year dividend

g = earning and dividend rate

rs = required rate of return

Now put these values to the above formula

So, the answer would be equal to

= $2 × (1 - 0.10) ÷ {13% - (- 10%)}

= $2 × 0.90 ÷ 23%

= $2 × 20.7

= $41.40

Since in the question, the growth rate is declining so we add the minus sign before writing the earning and the dividend rate.