You read in the paper that Summit Systems will pay a dividend of
â$1.00 this year. At that point you expectedâ Summit's dividend to grow by 5.5 %
per year. Today you read in the paper that Summit Systems has revised its growth prospects and expects its dividends to grow at a rate of 2.5 % per year forever. Theâ firm's equity cost of capital is 10.5 %.
a. What is the value of a share of Summit Systems stock based on the original expected dividend growth of
5.5 % perâ year?
b. If you tried to sell your Summit Systems stock after reading thisâ news, what price would you be likely toâ get? Why?