1. Indigo Ink Supply paid a dividend of $4 last year on its common stock. It is expected that this dividend will grow at a rate of 7% 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 3.2% per year. Investors require a return of 10% on the stock.
What will be the dividend paid out for the next six years?
What is the intrinsic value of Indigo’s stock?
2. What maximum price would you pay for a standard 8 level-coupon bond (with semi-annual payments and a face value of $1000) that has 10 years to maturity if the prevailing discount rate (your cost of capital) is an effective 10% per annum