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( 5 points ) Pepper is a young start - up company. No dividends will be paid on the stock over the next four years

(5 points) Pepper is a young start-up company. No dividends will be paid on the stock over the next
four years because the firm needs to plowback its earnings to future growth. The company will pay
a $1.25 per share dividend in 5 years and will increase the dividend by 10 percent per year for 5
years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 12
percent. The market price of Pepper is $13 per share currently.
a. What is the current share price?
b. Is the stock overpriced, underpriced, or fair priced? What is your investment strategy on Pepper's
stock?
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