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