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 28.60%, what is the value of Martell Mining's stock?

Expert Solution

Value of the Martell Mining's Stock

Current dividend per share (D0) = $5.00 per share

Dividend growth rate (g) = -5.00%

Required rate of return (Ke) = 28.60%

Price of the Stock = D0(1 + g) / (Ke - g)

Price of the Stock = $5.00(1 - 0.05) / (0.2860 - - 0.05)

Price of the Stock = ($5.00 x 0.95) / (0.2860 + 0.05)

Price of the Stock = $4.75 / 0.3360

Price of the Stock = $14.14 per share

Therefore, the Value of the Martell Mining's Stock will be $14.14

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