Martell Mining Company's ore reserves are being depleted, so its sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 3% per year. If D0 = $2 and rs = 16%, what is the value of Martell Mining's stock? Round your answer to two decimal places.

To calculate the value of Martell Mining's stock, we can use the dividend discount model (DDM). The DDM values a stock based on the present value of its future dividends.

Given the information provided, we know that the company's earnings and dividends are declining at a constant rate of 3% per year. This means that each year, the dividend will decrease by 3% of its previous value.

To calculate the value of the stock, we need to find the present value of all the future dividends using the DDM formula:

Stock Value = D0 / (rs - g)

where:
D0 = the most recent dividend payment
rs = required rate of return
g = the constant growth rate in dividends

In this case, D0 is given as $2 and rs is 16%. To find the growth rate (g), we need to calculate it using the given rate of decline.

First, we convert the rate of decline into a decimal by dividing it by 100: g = 3% / 100 = 0.03.

Now we can substitute the values into the formula:

Stock Value = $2 / (0.16 - 0.03)

Simplifying further:

Stock Value = $2 / 0.13

Stock Value ≈ $15.38 (rounded to two decimal places)

Therefore, the value of Martell Mining's stock is approximately $15.38.

$23.75