Question

Cooperton Mining just announced it will cut its dividend from $3.93 to $2.65 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 3.3% rate, and its share price was $49.51. With the planned expansion, Cooperton's dividends are expected to grow at a 4.8% rate. What share price would you expect after the announcement? (Assume that the new expansion does not change Cooperton's risk.) Is the expansion a good investment?

1) The new price for Cooperton's stock will be $_________(Round to the nearest cent.)

2) Is the expansion a good investment? yes/no

Answer 1

1. The new price is computed as follows:

= Dividend / (rate of return - growth rate)

rate of return is computed as follows:

= (Dividend / price of share) + growth rate

= ($ 3.93 / $ 49.51) + 3.3%

= 0.112377903

So, the new price will be as follows:

= $ 2.65 / (0.112377903 - 0.048)

= $ 41.16

2. Since the share price has declined to $ 41.16 from $ 49.51, hence it is not a good investment