Martell Mining Company's ore reserves are being depleted, so its sales are falling

Finance Dec 21, 2020

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 return 16.40%, what is the value of Martell Mining 's stock?

Expert Solution

Current Dividend (D₀) = $5

Growth Rate (g = -5%

Expected Dividend for next year (D₁) = 5 – (5% of 5)

= $4.75

Required rate of return (r) = 16.40%

Value of Stock = D₁ / r –g

= 4.75 / {0.1640 –(-0.05)}

= 4.75 / 0.1640 + 0.05

= 4.75 / 0.214

= $22.196

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