Cooperton Mining just announced it will cut its dividend from $3. 82 to $2. 43 p
ID: 2759587 • Letter: C
Question
Cooperton Mining just announced it will cut its dividend from $3. 82 to $2. 43 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. 12. With the planned expansion, Cooperton's dividends are expected to grow at a 4. 5% 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 $.Explanation / Answer
Price = recent dividend* ( 1 + growth rate )/( required rate of return - growth rate)
48.12 =3.82*(1+0.031)/( required rate of return-0.031)
required rate of return = 0.1128
New Price = recent dividend* ( 1 + growth rate )/( required rate of return - growth rate)
=2.43*(1+0.045)/(0.1128-0.031)
=
31.04