Question

Cooperton Mining just announced it will cut its dividend from $4.22 to $2.63 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 3.1% rate, and its share price was $48.83. With the plannes 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

Answer:

The expected share price=$20.07

Explanation:

Step 1: Calculate the price/earnings to growth ratio(PEG) ;

PEG ratio=(Price/EPS)/EPS growth

where;

Price=Price per share

EPS=earnings per share=share price

EPS growth=share price growth

In our case;

Price per share=$4.22

Share price=$48.83

Share price growth rate=3.1%=

Replacing;

PEG ratio=(4.22/48.83)/3.1

PEG ratio=0.0279

Step 2: Calculate share price

PEG ratio=(Price per share/share price)/share price growth

where;

PEG ratio=0.0279

Price per share=$2.63

Share price=x

share price growth rate=4.7%

Replacing;

0.0279=(2.63/x)/4.7=2.63/4.7 x

4.7 x×0.0279=2.63

x=2.63/(4.7×0.0279)

x=20.07

The expected share price=$20.07