Question text

Juan Diaz is contemplating investing in the stock of Indigo Inc, whose stock is currently trading for $18.99 per share. The company has recently commenced its operations and is not expected to pay any dividends for the next four years. The company's EPS currently stands at $2.75 and is expected to grow at a rate of 16% per annum over the next four years. Beginning in Year 5, the company's growth rate is expected to fall to 5% and remain at that level into perpetuity. From Year 5 onward, Indigo is also expected to retain 60% of its earnings and distribute the rest as dividends. Given a required rate of return of 12%, the company's stock is currently most likely:

a. Undervalued.

b. Overvalued.

c. Fairly valued.