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The Present Value of Common Bonds for Calamity Mining Company's

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Calamity Mining Company's iron ore reserves are being depleted, and its costs of recovering a declining quantity of ore are rising each year. As a result, the company's earnings are declining at a rate of 10 percent per year.If the dividend per share to be paid tomorrow is $5 and the required rate of return is 14 percent, what is the value of the firm's stock? Assume that the dividend payments are based on a fixed percentage of the firm's earnings.

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Solution Summary

The solution explains how to calculate the current value of a stock

Solution Preview

We use the dividend discount model to calculate the price
Price = D1/(Ke-g)
where
D1 = expected dividend in the coming year = $5 X ...

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