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 5% per year. If D0=$5 and rs=15%, what is the value of Martell Mining’s stock?

Answer 1

Answer:

$23.75

Explanation:

The value of the Martell Mining Company’s share shall be determined through following mentioned formula:

Value of share=[D0(1+g)/(rs-g)]

In the given question

D0=$5

g=growth rate= -5%

rs=required rate of return=15%

Value of share=[$5(1-5%)/(15%-(-5%))]

                         =$4.75/20%

                         =$23.75