Summit Systems has an equity cost of capital of 11%, will pay a dividend of $1.50 in

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Summit Systems has an equity cost of capital of 11%, will pay a dividend of $1.50 in one year and its dividends had been expected to grow by 6% per year. You read in the paper that Summit has revised its growth prospects and now expects its dividends to grow at a rate of 3% per year forever.
a. What is the drop in the 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?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Related Book For  book-img-for-question

Fundamentals of Corporate Finance

ISBN: 978-0132148238

2nd edition

Authors: Berk, DeMarzo, Harford

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