Q.1 Summit Systems has an equity cost of capital of 11%, will pay a dividend of $1.50 in one year & its dividends had been expected to grow by 6% per year. You read in the paper that Summit has revised its growth prospects & now expects its dividends to grow at a rate of 3% per year for ever.
Required:
a) What is the drop in the value of a Summit System's share based on this information?
b) If you tried to sell your Summit Systems shares after reading the news, what price would you be likely to get? Why?
Q.2 The mortgage on your house is five years old. It required monthly payments of $1402, had an original term of 30 years & had an interest rate of 10%. In the intervening five years, interest rates have fallen & so you have decided to refinance- that is, you will roll over the outstanding balance into a new mortgage. The new mortgage has a 30-year term, requires monthly payments & and has an interest rate of 6.625%
Required:
a) What monthly repayments will be required with the new loan?
b) If you still want to pay off the mortgage in 25 years, what monthly payments should you make after you refinance?