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29 Jun 2019

You read in the paper that Summit Systems will pay a dividend of

​$1.00 this year. At that point you expected​ 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. The​ 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 % per​ year?

b. If you tried to sell your Summit Systems stock after reading this​ news, what price would you be likely to​ get? Why?

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Collen Von
Collen VonLv2
29 Jun 2019

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Summit Systems has an equity cost of capital of 11.5 %​, willpay a dividend of ​$1.50 in one​ year, and its dividends had beenexpected to grow by 5.5 % per year. You read in the paper thatSummit Systems has revised its growth prospects and now expects itsdividends to grow at a rate of 2.5 % per year forever. a. What isthe drop in value of a share of Summit Systems stock based on this​information? b. If you tried to sell your Summit Systems stockafter reading this​ news, what price would you be likely to​ get?Why?

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Please Show Work.

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