The drop in value of a share of Summit Systems stock based on the revised growth prospects is -$0.125 or -12.5 cents. If you tried to sell your Summit Systems stock after reading this news, you would likely get a lower price due to the lower future dividend growth rate.
To calculate the drop in value of a share of Summit Systems stock, we need to calculate the present value of future cash flows.
First, let's calculate the dividend per share in one year using the expected growth rate of 6.5%. Dividend in one year = Dividend in the current year * (1 + growth rate) = $1.25 * (1 + 0.065) = $1.33125.
Next, we need to calculate the present value of the dividends using the equity cost of capital. Present value of dividends = Dividend in one year / (1 + cost of capital) = $1.33125 / (1 + 0.105) = $1.20625.
The drop in value of a share of Summit Systems stock is the difference between the present values of the old and new dividends. Drop in value = Present value of old dividends - Present value of new dividends = $1.20625 - $1.33125 = -$0.125.
Therefore, the drop in value of a share of Summit Systems stock based on this information is -$0.125 or -12.5 cents.
If you tried to sell your Summit Systems stock after reading this news, you would likely get a lower price because the revised growth prospects indicate a lower future dividend growth rate. Investors may expect lower returns, leading to a decrease in demand for the stock and a lower price.