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Indigo Ink Supply paid a dividend of $6.5 last year on its common stock. It is expected that this dividend will grow at a rate of 6.5% for the next five years. After that, the company will settle into a slower growth pattern and plans to pay dividends that will grow at a rate of 3% per year. Investors require a return of 9.5% on the stock. What will be the dividend paid out for the next six years? (Round your answers to 4 decimal places.) What is the intrinsic value of Indigo's stock? (Round your answer to 2 decimal places.) Intrinsic value $ __________

Respuesta :

Part a: The dividend paid for the next 6 years will be: For year 1 $6.92, year 2 $7.37, year 3 $7.85, year 4 $8.36, year 5 $8.90 and year 6 $9.17

Part b: The intrinsic value of the stock will be $119.57

The dividend discount model prices a stock to the discounted present value of future dividends. The appropriate discount rate is the required return on the stock, given its risks.

Part a:

The dividend for the next 6 years is:

year 1: 6.5 *(1 + 6.5%) = 6.92

year 2: 6.92*(1 + 6.5%) = 7.37

year 3: 7.37 *(1 + 6.5%) = 7.85

year 4: 7.85 *(1 + 6.5%) = 8.36

year 5: 8.36*(1 + 6.5%) = 8.90

year 6: 8.90*(1 + 3%) = 9.17

Present value calculation:

Year   Dividend.  Dividend and terminal value Present value factor  Present value

1.      =6.5(1+0.065)^1.   6.9225.         0.9132.      6.32

2.     =6.5(1+0.065)^2.  7.3725.          0.8340.     6.15

3.     =6.5(1+0.065)^3.   7.8517.           0.7617.      5.98

4.     =6.5(1+0.065)^4.   8.3620.          0.6956.    5.82

5.     =6.5(1+0.065)^5.   8.9056.          0.6352.    5.66

Terminal value             = 141.1200.      =0.6352.  89.64

Total                                                                      =119.57

Part b:

The intrinsic value of the stock is the present value of the dividends, discounted at the required rate of return of 9.5%, i.e.,

Learn more about intrinsic value:

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