Cooperton Mining just announced it will cut its dividend from $3.85 to $2.28 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 $48.53. With the planned expansion, Cooperton's dividends are expected to grow at a 4.6% 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?
Ke = [ D1 / P0 ] +g
Ke = Required Ret
D1 = Div after a year
P0 = Current Price
g = Growth rate
Ke = [ D1 / P0 ] +g
= [ 3.85 / 48.53 ] + 0.033
= 0.0793 + 0.033
= 0.1123
Price after Expansion:
P0 = D1 / [ Ke - g ]
= $ 2.28 / [ 0.1123 - 0.046 ]
= 2.28 / 0.0663
= 34.39
As price is fallan, Expansion is not good option.
Cooperton Mining just announced it will cut its dividend from $3.85 to $2.28 per share and use the extra funds to expand...
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