Napa Auto Parts' last dividend (t=0) was $1.00 and the company expects to experience no growth for the next 3 years (from t=0 - t=3). However, Napa will grow at an annual rate of 10% between the third and fourth year and between the fourth and fifth years. Starting from the end of the fifth year, Napa will grow at a 5% rate, thereafter. The required rate of return is 12%. What is the price of the stock expected to be at the end of the second year?
a)14.99 b)15.24 c)15.55 d)16.24 e)16.99
f)17.01 g)18.05 h)18.88 i)18.54 j)17.52
see attached file
dividend for the last year D0= $1.00
The stock price is the discounted value of all the dividends to be received in subsequent years
Year growth Dividend
0 $1.00 ...
The solution calculates the value of a stock.