Question

Financial analysts forecast Safeco Corp.’s (SAF) growth rate for the future to be 10 percent. Safeco’s recent dividend was $1.40. What is the value of Safeco stock when the required return is 12 percent?

Answer 1

The value of Safeco stock ( when the required return is 12 percent ) is $7.70.

Step-by-step explanation:

Dividend Discount model is used to calculate the value of company's stock using present value of future dividend. Dividend Growth model will be used to calculate the value of share. The dividend of $1.40 is expected to grow at 10% for indefinite time and it has required rate of return of 10%. Following formula will be used to calculate the value of share.

Price of Share =
`(D(1 + g))/((r - g))`

Price of Share =
`(1.40(1 + 0.10))/((0.12 - 0.10))`

Price of Share =
`(1.40(1.10))/(0.02)`

Price of Share =
`(1.54)/(0.02)`

Price of Share = $7.7