Question
Summit Systems has an equity cost of capital of 12.0%,will pay a dividend of $1.00in one...
Summit Systems has an equity cost of capital of 12.0%,will pay a dividend of $1.00in one year, and its dividends had been expected to grow by6.5% 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?
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