Question
top hedge fund manager Sally believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price
top hedge fund manager Sally believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $45. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.5%.
Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in 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 11.5 7.7
A. what is the discount rate on the stock? (enter your answer as a percent rounded to 2 decimal places.)
B. what price should she be willing to pay for the stock today? (enter your answer as a percent rounded to 2 decimal places)
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