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

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Drof's silver reserves are being depleted, so its sales arefalling. Also, because its pit is getting deeper each year, itscosts are rising. As a result, the company's earnings and dividendsare declining at the constant rate of 5% per year.If the currentdividend is $6 per share and the investor's required rate of returnis 13%, what is the value of Drof's stock?
Answer: $31.67
Please show all work and formulas used for a financialcalculator, not excel.

Answer & Explanation Solved by verified expert

3.6 Ratings (286 Votes)

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.

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Transcribed Image Text

Drof's silver reserves are being depleted, so its sales arefalling. Also, because its pit is getting deeper each year, itscosts are rising. As a result, the company's earnings and dividendsare declining at the constant rate of 5% per year.If the currentdividend is $6 per share and the investor's required rate of returnis 13%, what is the value of Drof's stock?Answer: $31.67Please show all work and formulas used for a financialcalculator, not excel.