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What is the maximum price would be willing to pay

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The shareholders of Newcrest Mining Limited have just received a dividend of $0.65 per share. Due to recent trade negotiations, investors have increased their required rate of return to 9% per annum for common stock investments of this perceived risk level.

Problem a) Assuming the market expects dividends of Newcrest Mining Limited to grow at a constant rate of 4% into perpetuity, what is the maximum price you would be willing to pay for this stock today?

Problem b) A breaking news article, describing the company's recent financial difficulties, advises investors to now expect dividends to decrease by 3% per annum for the next two years, and warns that dividends will be suspended in the following year while the firm undergoes strategic restructuring. Dividends are then expected to resume in four years from today when an annual dividend of $0.50 will be paid. Thereafter annual dividends are expected to grow at a rate of 4% per year into perpetuity.

Given this news, how much would investors now be willing to pay for Newcrest Mining Limited as of today?

Problem c) Keeping in mind the breaking news detailed above, and assuming you purchased Newcrest Mining Limited's common stock at the price calculated in Part a), should you still hold the stock in your portfolio given it's trading at exactly the amount calculated in Part b)?

Reference no: EM132790718

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