A firm recently paid a $0.55 annual dividend. The dividend is expected to increase by 11 percent...

Question:

A firm recently paid a $0.55 annual dividend. The dividend is expected to increase by 11 percent in each of the next four years. In the fourth year, the stock price is expected to be $26. If the required return for this stock is 14.5 percent, what is its current value?

Discounted Dividend Model:

A stock represents a share of a firm's ownership, and therefore entitles the investor to residual earnings of the firm in the form of dividends. Naturally, the value of a share of stock is the discounted present value of future dividends. This approach is called the discounted divided model.

Answer and Explanation:

The price of the stock today is $17.45.

According to the discounted dividend models, the price of the stock is the discounted present value of...

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