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 $53. The stock will pay a dividend at year-end of $2.30. Assume that risk-free Treasury securities currently offer an interest rate of 2.3%. |
Average rates of return on Treasury bills, government bonds, and common stocks, 19002013 (figures in percent per year) are as follows. |
Portfolio | Average 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 on the stock?(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 | $ |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started