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Q1 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
Q1 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 17.20%, what is the value of Martell Mining's stock?
Q2 War Corporation just paid a dividend $1.5 a share. The dividend is expected to grow 9.20% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 4 years?
Expert Solution
1. The value is computed as shown below:
= [ Current dividend x (1 - growth rate) ] / (required rate of return + growth rate)
= [ $ 5 x 0.95 ] / (0.1720 + 0.05)
= $ 4.75 / 0.222
= $ 21.40
2. Expected dividend is computed as shown below:
Dividend in year 1 is computed as follows:
= Dividend paid x (1 + growth rate)
= $ 1.5 x 1.092
= $ 1.638
Dividend in year 2 is computed as follows:
= Dividend in year 1 x (1 + growth rate)
= $ 1.638 x 1.092
= $ 1.788696
Dividend in year 3 is computed as follows:
= Dividend in year 2 x (1 + growth rate)
= $ 1.788696 x 1.092
= $ 1.953256032
Dividend in year 4 is computed as follows:
= Dividend in year 3 x (1 + growth rate)
= $ 1.953256032 x 1.05
= $ 2.050918834
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