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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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VALUATION OF A DECLINING GROWTH STOCK 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 6% per year. If D0, $3 and rs = 10%, what is the value of Maxwell Mining’s stock?

Summary Introduction

To compute: The value of stock for Company M with declining growth in dividends.

Introduction:

Value of Stock:

Value of stock is an amount computed to evaluate the stock of a company for investment purpose. It determines the dividends payout at the present value at the required rate of return less growth rate or plus growth rate for stock with declining growth in dividends.

Explanation

Given information:

Dividend is $3.

Required rate of return is 10% or 0.10.

Declining growth rate is 6% or 0.06.

Formula to compute stock value,

P0=D0×(1+g)rsg

Where,

  • D0 is the dividend.
  • P0 is the current value of stock.
  • rs is the required rate of return.
  • g is the growth rate.

Substitute $3 for D0 and 0

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