Question

1.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=$3 and Rs=11%, what is the value of Maxwell Mining's stock? Round your answer to the nearest cent.

2.A stock is expected to pay a dividend of $1.75 at the end of the year (i.e.,D1=$1.75), and it should continue to grow at a constant rate of 10% a year. If its required return is 15%, what is the stock's expected price 3 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Solution (1)

Price₀ = Dividend₁ / (RR - Growth rate)

Price₀ = $3 (1 - 0.10) / [0.11 - (-0.10)]

Price₀ = $2.70 / 0.21 = $12.86

Solution (2)

Calculation of Price 3 years from today

Price₃ = Dividend₄ / (RR - Growth rate)

Price₃ = $1.75 (1+0.10)³ / (0.15 - 0.10)

Price₃ = $2.33 / (0.15 - 0.10)

Price₃ = $2.33 / 0.05 = $46.60