Question 1

ABC Mining Company has been operating an iron ore mine for the last 10 years. With the passage of time, the company finds that the iron ore extracted is declining each year. The company just paid a dividend of $2 per share and announced that the amount would decline at a rate of 3% each year for the foreseeable future. The required return for ABC Mining shares is 13%.

(a) What is the price per share of ABC Mining Company?

(5 marks)

(b) Assess and discuss why someone may want to invest in a company with negative growth in profits.

(5 marks)