Question

4. Markel Mining company’s ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its cost are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 4.5% per year. If D0 = $6.25 and rs = 12%, what is the value of Markel Mining’s stocks?

Answer 1

As per dividend discount model, current price of stock is the present value of future dividends.
Price of stock	=	D0*(1+g)/(k-g)		Where,
	=	6.25*(1-0.045)/(0.12+0.045)		D0	$       6.25
	=	$    36.17		g	-4.50%
				K	12%