Question

9.9/9.10

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 9% per year. If Do = $5 and rs = 12%, what is the value of Maxwell Mining's stock? Round your answer to the nearest cent.

Answer 1

a.Current price=D1/(Required return-Growth rate)

=(5*(1-0.09))/(0.12-(0.09)
=4.55/0.21

=$21.67(Approx).

b.Current price=D1/(Required return-Growth rate)

=2/(0.15-0.09)

=$33.33(Approx)

Hence P5=Current price*(1+Growth rate)^5

=33.33*(1.09)^5

=$51.29(Approx).