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Martell Mining Company's ore reserves are being depleted, so its sales are falling
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 current dividend is $5 and required rate of retum 21.60%, what is the value of Martell Mining's stock?
Expert Solution
Using the dividend discount model, it states that the value of the share is given by deviding the expected dividends by the denominator ( Required rate of return - Dividend growth rate)
Value = Expected dividends/( Required rate of return - Dividend growth rate)
Expected dividends = Current dividend * (1 + Growth rate)
= 5 * (1 + (-5%) {Dividend growth rate being negative 5%)
= $4.75
Required rate of return = 21.6% (given)
Value = 4.75 / ( 21.6% - (-5%))
value = 17.8571
Therefore we get the value of the share of Martell mining as $17.85
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