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

$21.11

Step-by-step explanation:

Given that,

Current dividend, D0 = $4

Rate of return, rs = 13%

`P_(0)=(D_(0)*(1+g) )/(rs-g) )`

Here,

Current price of the stock =
`P_(0)`

Growth rate, g = 5%

`P_(0)=(4*(1+(-0.05)) )/(0.13-(-0.05)) )`

`P_(0)=(3.8)/(0.18)`

= $21.11

Therefore, the value of stock is $21.11