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Safeco is expected to pay a dividend of $1.00 next year and $1.85 in the following...

Safeco is expected to pay a dividend of $1.00 next year and $1.85 in the following year, and $2.25 in the following year. Analysts believe that Safeco will hit their price target of $92.50 in three years. What is the value of Safeco stock if your required return is 10.25 percent?

Solutions

Expert Solution

Calculation of stock's current price:
Year Particulars Amount PVF @10.25% Present value
1 Dividend                       1.00 0.907                       0.91
2 Dividend                       1.85 0.823                       1.52
3 Dividend+price                     94.75 0.746                     70.70
Total                     73.13
So value of stock is $73.13
Wrking: Year 3= dividend + price= 2.25+92.50=$94.75

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