Question

In: Finance

1.Maxwell Mining Company's ore reserves are being depleted, so its sales are falling. Also because its...

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.

Solutions

Expert Solution

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


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