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    Valuation of a Stock for Napa Auto Parts: Calculate the Current Price using ROR Methods

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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 for Napa is 12% for the first 3 years, 8% for years 4 and 5, and 10% for years 6 onwards? What is the current price (t=0) of Napa shares?
    possible answers
    a)18.02 b)18.52 c)20.45 d)21.02 e)21.52
    f)21.89 g)20.02 h)22.12 i)22.89 j)19.37

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    Solution Preview

    This is a combined use of DDM and Present Value calculation:
    The current price should be the sum of all the PV's of all the cash flow generated by the stock.
    Please refer to EXCEL for calculation:
    Year Growth rate Cash Flow (dividend) Return ...

    Solution Summary

    Using Excel, the solution presents full calculations using two methods to determine current price.