Top hedge fund manager Sally Buffet believes that a stock with the same market risk as the S&P 500 will sell at year end at a price of $40. The stock will pay a dividend ay year-end of $3.00. Assuming that risk-free Treasury securities currently offer an interest rate of 1.5%.

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)

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)