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Indigo River Shipping stock has an expected return of 9.68 percent and pays annual dividends that...

Indigo River Shipping stock has an expected return of 9.68 percent and pays annual dividends that are expected to grow annually by 2.5 percent forever. The firm’s next dividend is expected in 1 year from today. If the firm’s dividend is expected to be 18.65 dollars in 5 years from today, then what is the current price of the stock?

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Answer #1
Expected return (Ke) = 9.68% or 0.0968
Growth rate (g) = 2.5% or 0.025
Next dividend in 5 Years (D5) = 18.65
Price of stock at end of 4th years (P4) = D5/(ke-g)
18.65/(0.0968-0.025)
259.7493
Price of stock at end of 4th years is $259.7493.
Price of stock day = P4/(1+ke)^n
259.7493 /(1+0.0968)^4
$ 179.49
So, Current price of stock is $179.49.
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