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    Valuation of a stock

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    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?
    possible answers:
    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

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    Solution Preview

    see attached file

    Answer:c)15.55

    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 ...

    Solution Summary

    The solution calculates the value of a stock.

    $2.49

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