Question

Cooperton Mining just announced it will cut its dividend from $4.01 to $2.57 per share and use the extra funds to expand. Prior to the​ announcement, Cooperton's dividends were expected to grow at a 3.4% ​rate, and its share price was $50.07. With the planned​ expansion, Cooperton's dividends are expected to grow at a 4.7% 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

$34.35

The price has fallen from $50.07 to $34.35 which means that Expansion will not be a good option.

Step-by-step explanation:

Computation for the share price to expect after the announcement

Using this formula

Ke = [ D1 / P0 ] +g

Where,

D1 =$4.01

P0 = $50.07

g =3.4%

Let plug in the formula

Ke = [ D1 / P0 ] +g

Ke= [ $4.01 / $50.07] + 0.034

Ke= 0.0800+ 0.034

Ke= 0.1140

Second step is to find the Price after Expansion using this formula

P0 = D1 / [ Ke - g ]

Where,

D1=$2.57

Ke=0.1140

g=4.7%

Let plug in the formula

P0= $ 2.57 / [ 0.1140 - 0.047 ]

P0=$2.57/0.067

P0=$ 34.35

Based on this calculation, we can see that the price has fallen from $50.07 to $34.35 which means that Expansion will not be a good option.

Therefore the share price that you would expect after the​ announcement will be $34.35