Question

Cooperton Mining just announced it will cut its dividend from $4.17 to $2.56 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 $50.47. With the planned expansion, Cooperton's dividends are expected to grow at a 46% 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?

Answer 1

Answer: New share price= Price = $35.38. No, it's not a good investment

Step-by-step explanation:

First, we have to calculate the cost of equity.

Price = Dividend/r - g

Dividend = $4.17 × (1 + 3.3%)

= $4.17 × (1 + 0.033)

= $4.17 × 1.033

= $4.30761

Price = Dividend/r - g

50.47 = 4.30761/r - 0.033

r - 0.033 = 4.30761/50.47

r - 0.033 = 0.08535

r = 0.08535 + 0.033

r = 0.11835

Now, we have to calculate the new price with dividend of $2.56 and g= 4.6%.

Price = Dividend/r - g

Price = 2.56/0.11835 - 0.046

Price = 2.56/0.07235

Price = $35.38

The expansion isn't a good investment because the stock price is s reduced from $50.47 to $35.38