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13 October, 23:53

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?

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  1. 14 October, 01:57
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    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
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