One year ago Indigo Company paid a 4 dividend, and during the current year it has experienced a 10 growth rate. The company just paid a dividend of 4.40, i.e., D(o) = 4.40.
Due to a new, advanced production technique, Indigo expects to achieve a dramatic increase in its short-term growth rate, to 25 annually for the next 3 years. After this time, growth is expected to return to the long-run constant rate of 10. If investors require a 15 rate of return, at what price should the stock of Indigo Company be selling today? (Round to the nearest whole dollar.)
A) 140
B) 181
C) 126
D) 110
E) 157
Question 2
Martian Airways Inc. has a 12 required rate of return. It does not expect to initiate dividends for 15 years, at which time it will pay 2.00 per share in dividends. At that time, Martian Airways expects its dividends to grow at 7 forever.
What is an estimate of Martian Airways' price in 15 years (P15) if its dividend at the end of year 15 is 2.00?
A) 42.80
B) 33.40
C) 31.20
D) 30.00
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