Question
Top hedge fund manager Diana Sauros believes that a stock with the same market risk as the S&P 500 will sell at year-end at a
Top hedge fund manager Diana Sauros believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $56. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.9%.
Average rates of return on Treasury bills, government bonds, and common stocks, 19002013 (figures in percent per year) are as follows.
Portfolio | Avg Annual Rate of Return | Average Premium (extra return versus treasury bills) | |
Treasury bills | 3.9 | ||
Treasury Bonds | 5.2 | 1.3 | |
Common Stocks | 11.5 | 7.6 |
What is the discount rate if the interest rate is 4.0%? (Enter your answer as a percent rounded to 2 decimal places.) Discount rate % =?
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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