Drof's silver reserves are being depleted, so its sales are falling. Also, because its pit is...

Drof's silver 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 the current dividend is $6 per share and the investor's required rate of return is 13%, what is the value of Drof's stock?

Answer: $31.67

Please show all work and formulas used for a financial calculator, not excel.

Solutions

Expert Solution

Information provided:

Current dividend= $6

Growth rate= -5%

Required rate of return= 13%

The value of the stock is calculated using the dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Value of the stock today= $6*(1 - 0.05)/ 0.13 – (-0.05)

= $5.70/ 0.18

= $31.67.

In case of any query, kindly comment on the solution.

jeff jeffy answered 3 months ago

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