Question

Need help with the finance question. Thanks for help!

Summit Systems has an equity cost of capital of 11.5%, will pay a dividend of $1.75 in one year, and its dividends had been expected to grow by 7.0% per year. You read in the paper that Summit Systems has revised its growth prospects and now expects its dividends to grow at a rate of 2.5% per year forever. a. What is the drop in value of a share of Summit Systems stock based on this information? b. If you tried to sell your Summit Systems stock after reading this news, what price would you be likely to get? Why? a. What is the drop in value of a share of Summit Systems stock based on this information? The drop in value of a share of Summit Systems stock is $ . (Round to the nearest cent.)

Answer 1

Cost of of capital :- Ke = j): 54.__ Dividend in one year i s = $1.75. Growth rate W alg = 7% - and forother information that the growth rate of dividend fall to 2.54 Market price of af Share 117 DI Po = DPs DPSI ke-g. og ke-g. 7% groth rate of dividend price of shave at Por $175 - $38.8%. 11.54.-7% growth rale of dividend 11 price of Share if is 2:54. Po = $1.75 11.54.–2.5% 1.44 of the @ The drop in the value of share _summit systems stock based on information _ _= $38.89 – $19.44 - = $19.45

after this growth rate is ) (6 If we want to sell share news of falling in dividend • the price we likely to get - $ 19.44._ _ _ aliano _ AN_ Because the decrease in the of dividend the price of expected to fall to $19.44 $38.89 growth rate share was from the
a. The price fall due to news is $19.45 per share

b. The expected sale price after the news was $19.44 per share