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.

Question

Business

Nadia Farley

23 June, 01:27

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.

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Answers (1)

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Elsa Kim · Answer 1

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