Question

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 = $4 and r_s = 9%, what is the value of Maxwell Mining's stock? Round your answer to the nearest cent.

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A stock is expected to pay a dividend of $2.75 at the end of the year (i.e., D₁ = $2.75), and it should continue to grow at a constant rate of 3% a year. If its required return is 14%, what is the stock's expected price 3 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.

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You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $2.25 a share at the end of the year (D₁ = $2.25) and has a beta of 0.9. The risk-free rate is 4.6%, and the market risk premium is 6.0%. Justus currently sells for $36.00 a share, and its dividend is expected to grow at some constant rate, g. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years? (That is, what is P3?) Do not round intermediate calculations. Round your answer to the nearest cent.

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Answer 1

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

=(4*(1-0.06)/(0.09-(0.06)

=3.76/0.15

=$25.07(Approx)

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

=2.75/(0.14-0.03)

=25

P3=Current price*(1+Growth rate)^3

=25*(1.03)^3

=$27.32(Approx)

3.Required return=risk free rate+Beta*market risk premium

=4.6+(0.9*6)

=10%

Required return=(D1/Current price)+Growth rate

0.1=(2.25/36)+Growth rate

Growth rate=0.1-(2.25/36)

=0.0375

P3=Current price*(1+Growth rate)^3

=36*(1+0.0375)^3

=$40.20(Approx)