Summit Systems has an equity cost of capital of 11%, will pay a dividend of $1.75 in one year and its dividends had been expected to grow by 6.5% 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 2.5% 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?