A firm is expected to pay a dividend of $2.15 next year and $2.30 the following

Question

A firm is expected to pay a dividend of $2.15 next year and $2.30 the following year. Financial analysts believe the stock will be at their price target of $80 in two years.

Compute the value of this stock with a required return of 12.1 percent. (Round your answer to 2 decimal places.)

Financial analysts forecast Safeco Corp.’s (SAF) growth rate for the future to be 10 percent. Safeco’s recent dividend was $1.55.

What is the value of Safeco stock when the required return is 12 percent?

Financial analysts forecast Limited Brands (LTD) growth rate for the future to be 10.5 percent. LTD’s recent dividend was $0.45.

What is the value of Limited Brands stock when the required return is 12.5 percent? (Round your answer to 2 decimal places.)

A firm is expected to pay a dividend of $2.15 next year and $2.30 the following year. Financial analysts believe the stock will be at their price target of $80 in two years.

Explanation / Answer

Part A)

The value of the stock can be calculated with the use of following formula:

Value of Stock = Dividend Year 1/(1+Required Return)^1 + (Dividend Year 2 + Stock Price at Year 2)/(1+Required Return)^2

______

Using the information provided in the question, we get,

Value of Stock = 2.15/(1+12.1%)^1 + (2.30 + 80)/(1+12.1%)^2 = $67.41 (answer)

______

Part B)

The value of stock can be calculated with the use of following formula:

Value of Stock = Dividend*(1+Growth Rate)/(Required Return - Growth Rate)

______

Using the information provided in the question, we get,

Value of Stock = 1.55*(1+10%)/(12%-10%) = $85.25 (answer)

______

Part C)

The value of stock can be calculated with the use of following formula:

Value of Stock = Dividend*(1+Growth Rate)/(Required Return - Growth Rate)

______

Using the information provided in the question, we get,

Value of Stock = .45*(1+10.5%)/(12.5%-10.5%) = $24.86 (answer)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.