What is dividend yield-expected price gain-holding return

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In the wake of low commodity prices, Bad Time Mining Corp. announces that it will pay a dividend of $1.20 at the end of 2017. It further announces that it will reduce its dividends by 5% for 2018 before returning to its previous policy of increasing its dividends by 5% every year. The implied return on BTM Corp. is 10%.

(a) Based on this information, find the price for the stock of BTM Corp. at the start of 2017, 2018, 2019, 2020. [Hint: You need to work backwards applying DCF valuation.]

(b) What is the dividend yield, expected price gain and total expected holding return for 2017, 2018, 2019?

(c) Suppose at the start of 2020 Bad Time Mining Corp. instead announces that it slashes its dividend by 50% forever reinvesting the remaining 50% in expanding its mine which yields a return on equity (ROE) of 12%. Will the price of its stock increase or decrease upon the announcement assuming that the implied return remains at 10%?

Reference no: EM131496999

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