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24 April, 05:57

Cooperton Mining just announced it will cut its dividend from $4.17 to $2.56 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 $50.47. With the planned expansion, Cooperton's dividends are expected to grow at a 46% 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. 24 April, 07:41
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    Answer: New share price = Price = $35.38. No, it's not a good investment

    Explanation:

    First, we have to calculate the cost of equity.

    Price = Dividend/r - g

    Dividend = $4.17 * (1 + 3.3%)

    = $4.17 * (1 + 0.033)

    = $4.17 * 1.033

    = $4.30761

    Price = Dividend/r - g

    50.47 = 4.30761/r - 0.033

    r - 0.033 = 4.30761/50.47

    r - 0.033 = 0.08535

    r = 0.08535 + 0.033

    r = 0.11835

    Now, we have to calculate the new price with dividend of $2.56 and g = 4.6%.

    Price = Dividend/r - g

    Price = 2.56/0.11835 - 0.046

    Price = 2.56/0.07235

    Price = $35.38

    The expansion isn't a good investment because the stock price is s reduced from $50.47 to $35.38
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