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JJ Industries will pay a regular dividend of $0.80 per share for each of the next four years. At the end of the four years, the company will also pay out a liquidating dividend of $77 per share, and the company will cease operations. If the discount rate is 7 percent, what is the current value of the company's stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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Step-by-step explanation:

To calculate the current value of the company's stock, we need to find the present value of all the future cash flows, including the regular dividends for the next four years and the liquidating dividend at the end of the fourth year.

Let's break down the calculation:

Step 1: Calculate the present value of the regular dividends for the next four years.

PV of regular dividends = D1 / (1 + r)^1 + D2 / (1 + r)^2 + D3 / (1 + r)^3 + D4 / (1 + r)^4

where,

D1 = Regular dividend in the first year = $0.80 per share

D2 = Regular dividend in the second year = $0.80 per share

D3 = Regular dividend in the third year = $0.80 per share

D4 = Regular dividend in the fourth year = $0.80 per share

r = Discount rate = 7% = 0.07

PV of regular dividends = 0.80 / (1 + 0.07)^1 + 0.80 / (1 + 0.07)^2 + 0.80 / (1 + 0.07)^3 + 0.80 / (1 + 0.07)^4

PV of regular dividends ≈ 0.7476 + 0.6988 + 0.6537 + 0.6116

PV of regular dividends ≈ 2.7117

Step 2: Calculate the present value of the liquidating dividend at the end of the fourth year.

PV of liquidating dividend = D5 / (1 + r)^4

where,

D5 = Liquidating dividend at the end of the fourth year = $77 per share

PV of liquidating dividend = 77 / (1 + 0.07)^4

PV of liquidating dividend ≈ 77 / 1.3108

PV of liquidating dividend ≈ 58.6901

Step 3: Calculate the current value of the company's stock (total present value of all cash flows).

Current value of stock = PV of regular dividends + PV of liquidating dividend

Current value of stock ≈ 2.7117 + 58.6901

Current value of stock ≈ 61.4018

The current value of the company's stock is approximately $61.40 per share.

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