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 10% per year. If D0 = $6 and rs = 15%, what is the value of Maxwell Mining's stock? Round your answer to the nearest cent.

Answer 1

Answer:

The current value of stock is $21.60 per share.

Explanation:

The current value of the stock whose dividends are growing/declining at a constant rate can be calculated using the constant growth model of DDM.

The growth will be taken as a negative percentage in case the growth rate is falling. So, g will be g= -0.1 or -10%. The formula for price under this model is,

P0 = D0 * (1+g)  /  ( r - g)

Where,

• D0 * (1+g) is the dividend expected for the next period or D1
• r is the required rate of return
• g is the growth rate

Taking g as -0.1.

P0 = 6 ( 1 - 0.1)  /  (0.15 + 0.1)

P0 = $ 21.60