You read in the paper that Summit Systems will pay a dividend of $2.00 this year. At that point you expected? Summit's dividend to grow by 6.0% per year.
Today you read in the paper that Summit Systems has revised its growth prospects and expects its dividends to grow at a rate of 2.5% per year forever. The? firm's equity cost of capital is 10.0%.
a. What is the value of a share of Summit Systems stock based on the original expected dividend growth of 6.0 %6.0% per year?
b. If you tried to sell your Summit Systems stock after reading this? news, what price would you be likely to get? Why?
a. What is the value of a share of Summit Systems stock based on the original expected dividend growth of 6.0% per year? The value of a share is $nothing. ?(Round to the nearest? cent.)
b. If you tried to sell your Summit Systems stock after reading this? news, what price would you be likely to get Why?(Select the best choice below.)
A. You would receive $50.00 if you act very quickly because it takes a day or two for markets to incorporate the information about the new growth rate.
B. You would receive $50.00 because when you bought the stock, the dividend growth rate was still 6.0 %6.0%.
C. You would receive $26.67 because markets are efficient and would incorporate the information about the new growth rate immediately.
D. You would receive a price between $ 26.67 and $50.00 because you should get a blend of the old and new growth rate of dividends.