Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&
Top hedge fund manager Sally Buffit believes that a stock with the
same market risk as the S&P 500 will sell at year-end at a price of $58. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.7%.
Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2015 (percent per year) are as follows.
Portfolio Average Annual Rate of Return (%) Average Premium (Extra return versus Treasury bills) (%)
Treasury bills 3.8
Treasury bonds 5.3 1.5
Common stocks 11.4 7.6
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What is the discount rate on the stock?percentage 2 decimal places
Discount rate: %
What price should she be willing to pay for the stock today? 2 decimal places
Stock price
