Final answer:
After Cooperton Mining's dividend cut and expansion plans, its stock must be revalued considering the new dividend amount and expected growth rate. The value will be based on the dividend discount model and whether the higher growth can compensate for the initial lower dividends. Investors must weigh the new growth prospects against the immediate decrease in dividends to decide if the expansion is a good investment.
Step-by-step explanation:
When Cooperton Mining cut its dividend from $4.00 to $2.50 to fund an expansion, without a change in risk, it affected shareholder expectations and the stock price. Before the announcement, Cooperton's share price was likely based on the dividend discount model, which values a stock based on projected dividends and dividend growth rates. With a $4.00 dividend growing at 3.0%, and using an appropriate discount rate, the share price was $50.00. After the announcement, the new $2.50 dividend with an expected growth rate of 5.0% requires a reevaluation of the stock price.
Theoretically, despite the lower initial dividend, the higher growth rate could offset the decrease and potentially lead to a higher future stock price. Whether the expansion is a good investment would depend on the actual discount rate (which can be akin to the required rate of return), the precise calculation of the new share price, and the likelihood of achieving the projected growth rate.
The case of Babble, Inc. provides an example of how present and future profits, distributed as dividends, can influence what an investor will pay for a share of stock. If Babble is expected to make profits right away and continue over the next two years before being disbanded, the share price would be the present value of those dividends. Investors would consider the timing and amount of the profits, discounting them back to their present value, to determine the fairest price per share.