Answers
Answer a.
If expected growth rate is 5.50%:
Value of share = Expected dividend / (Cost of capital - Growth rate)
Value of share = $1.50 / (0.1150 - 0.0550)
Value of share = $25.00
If expected growth rate is 2.50%:
Value of share = Expected dividend / (Cost of capital - Growth rate)
Value of share = $1.50 / (0.1150 - 0.0250)
Value of share = $16.67
So, value of share will drop by $8.33 ($25.00 - $16.67) based on the information.
Answer b.
If the information about Summit Systems has reached the capital market which means that revised growth rate has been already applied. So, if you sell the stock, then you will receive $16.67
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