Question

Cooperton Mining just announced it will cut its dividend from $ 3.86 to $ 2.48 per share and use the extra funds to expand. Prior to the​ announcement, Cooperton's dividends were expected to grow at a 3.2 % ​rate, and its share price was $ 50.12. With the planned​ expansion, Cooperton's dividends are expected to grow at a 4.9 % 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:

First we need to find the required rate of return on Cooperton Mining

We can use the DDM model for that

D*(1+G)/R-G=Price

Before the dividend cut

50.12=3.86*1.032/R-0.032

50.12R-1.60=3.98

R=0.11 or 11%

Now we can use R from this to find the expected share price after the dividend cut

2.48*1.049/0.11-0.049= $42.6 Will be the new expected price.

Explanation: