30. You read in the paper that Summit Systems from Problem 6 has revised its growth prospects and now expects its dividends to grow at 3% per year forever. a. What is the new 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 and why? 31. In early 2018, Coca-Cola Company (KO) had a share price of $44, and had paid a dividend of $1.48 for the prior year. Suppose you expect Coca-Cola to raise this dividend by approximately 7% per year in perpetuity. a. If Coca-Cola's equity cost of capital is 8%, what share price would you expect based on your estimate of the dividend growth rate? b. Given Coca-Cola share price, what would you conclude about your assessment of Coca- Cola's future dividend growth? 32. Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. While the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $180 million at the end of this year and by $60 million at the end of next year. a. If Roybus has 35 million shares outstanding and a weighted average cost of capital of 13%, what change in Roybus's stock price would you expect upon this announcement? (Assume the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus's stock on hearing this announcement and make a profit? Explain. 30. You read in the paper that Summit Systems from Problem 6 has revised its growth prospects and now expects its dividends to grow at 3% per year forever. a. What is the new 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 and why? 31. In early 2018, Coca-Cola Company (KO) had a share price of $44, and had paid a dividend of $1.48 for the prior year. Suppose you expect Coca-Cola to raise this dividend by approximately 7% per year in perpetuity. a. If Coca-Cola's equity cost of capital is 8%, what share price would you expect based on your estimate of the dividend growth rate? b. Given Coca-Cola share price, what would you conclude about your assessment of Coca- Cola's future dividend growth? 32. Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. While the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $180 million at the end of this year and by $60 million at the end of next year. a. If Roybus has 35 million shares outstanding and a weighted average cost of capital of 13%, what change in Roybus's stock price would you expect upon this announcement? (Assume the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus's stock on hearing this announcement and make a profit? Explain
