Question

Cooperton Mining just announced it will cut its dividend from $3.77 to $2.52 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 $51.06. 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?

The new price for​ Cooperton's stock will be?

​(Round to the nearest​ cent.)

Is the expansion a good​ investment? ​

Answer 1

Cost of equity=(Dividend/Share price)+growth rate=(3.77/51.06)+3.3%=7.38%+3.3%=10.68%

Then dividends cut it down to 2.52 and dividends grows at 4.8%.

Share Price=New Dividend/(cost of equity-growth rate)=2.52/(10.68%-4.8%)=$42.83

The expansion is not good because the Share price came down to $42.83 from $51.06.