Question

Cooperton Mining just announced it will cut its dividend from $3.83 to $2.73 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 $51.57. With the planned expansion, Cooperton's dividends are expected to grow at a 48% 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.)

Answer 1

Price	=	Dividend / (Re - growth)
Re	=	Dividend Yield + Growth rate
	=	($3.83 / $51.57) + 0.033
	=	10.73%
New Price	=	Dividend / (Re - growth)
	=	$2.73 / (0.1073 - 0.048)
	=	$    46.04
Due to Expansion the price decreases from $51.57 to $46.04. Hence it is not a good Investment.