Question
13. Cooperton Mining just announced it will cut its dividend from $3.99 to $2.38 per share...
13. Cooperton Mining just announced it will cut its dividend from $3.99 to $2.38 per share and use the extra funds to expand. Before the announcement, Cooperton's dividends were expected to grow at a 3.4%
rate, and its share price was $48.83. 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?
Answers
48.83r - 1.66022 = 4.12566
r = (4.12566 + 1.66022) / 48.83
r = 11.85%
= $ 34.85
After the announcement the value of share is expected to be $ 34.85
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DO(1+G) Valueof Existing stock = = r - G48.83 = 3.99(1 + 0.034) r – 0.034DO(1 +G)) Valueof New Stock = = T - G2.38(1+0.047)) 10.1185 -0.047
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