Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Summit Systems has an equity cost of capital of 11.5%, will pay a dividend of $2.00 in one year, and its dividends had been expected
Summit Systems has an equity cost of capital of 11.5%, will pay a dividend of $2.00 in one year, and its dividends had been expected to grow by 6.5% 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 Summit Systems share based on this information? b. If you tried to sell your Summit Systems shares after reading this news, what price would you be likely to get? Why? a. What is the drop in value of a Summit Systems share based on this information? The drop in value of a Summit Systems share is $ . (Round to the nearest cent.) b. If you tried to sell your Summit Systems shares after reading this news, what price would you be likely to get? Why? The price of a share would likely be $. (Round to the nearest cent.) Why? (Select the best choice below.) O A. You would receive $40.00 because when you bought the shares, the dividend growth rate was still 6.5%. B. You would receive $22.22 because markets are efficient and would incorporate the information about the new growth rate immediately. C. You would receive $40.00 if you act very quickly because it takes a day or two for markets to incorporate the information about the new growth rate. D. You would receive a price between $22.22 and $40.00 because you should get a blend of the old and new growth rate of dividends
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started