Business Finance Major Assignment Paper

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 divi
dends to grow at a rate of 3% per year for ever.
Required:
a)
What is the drop in the value of a Summit Systems
share based on this information?
b)
If you tried to sell your Summit Systems shares aft
er reading the news, what price would you
be likely to get? Why?
Marks: 10
Q.2
The mortgage on your house is five years old. It r
equired 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 refinanc
e- 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)
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What monthly repayments will be required with the n
ew loan?
b)
If you still want to pay off the mortgage in 25 years, what monthly payments should you
make after you refinance?