Financial analysts forecast Safeco Corp.'s (SAF) growth rate for the future to be 8 percent. Safeco's recent dividend was $1.85. What is the value of Safeco stock when the required return is 10 percent?

Question

Porter Norman

Business

16 April, 14:22

Financial analysts forecast Safeco Corp.'s (SAF) growth rate for the future to be 8 percent. Safeco's recent dividend was $1.85. What is the value of Safeco stock when the required return is 10 percent?

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Answers (1)

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Aydin · Answer 1

The price of the stock today is $99.9

Explanation:

The growth rate of 8% is assumed to remain constant throughout the future. In this case, the constant growth model of the DDm will apply. The formula for price of the stock today using the constant growth model is,

Price = D0 * (1+g) / (r - g)

Where,

D0 * (1+g) gives the dividend for the next period D1 r is the required rate of return g is the growth rate

Price = 1.85 * (1+0.08) / (0.1 - 0.08)

Price = $99.9