Question
op 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
op 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 $54. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.4%.
Average rates of return on Treasury bills, government bonds, and common stocks, 19002017 (figures in percent per year) are as follows.
Portfolio | Average Annual Rate of Return % | Average Premium (Extra return versus Treasury bill) % |
Treasury Bill | 3.8 | |
Treasury Bond | 5.3 | 1.5 |
Common Stock | 11.5 | 7.7 |
A. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places).
Discount Rate | % |
B. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places).
Stock Price |
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