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

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

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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3. New Mining Company's iron ore reserves are being depleted, and its costs of recovering a declining quantity of iron ore are rising each year. As a result, the company's earnings are declining at a rate of 5 percent each year. If the dividend per share to be paid tomorrow is $10 and the required rate of return is 10 percent, what should be the firm's share price? Assume that the dividend payments are based on a fixed percentage of the firm's earnings. Briefly explain your answer.
Transcribed Image Text:3. New Mining Company's iron ore reserves are being depleted, and its costs of recovering a declining quantity of iron ore are rising each year. As a result, the company's earnings are declining at a rate of 5 percent each year. If the dividend per share to be paid tomorrow is $10 and the required rate of return is 10 percent, what should be the firm's share price? Assume that the dividend payments are based on a fixed percentage of the firm's earnings. Briefly explain your answer.
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