Question
Top 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
Top 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 $41. The stock will pay a dividend at year-end of $2.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.6%.
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 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?
b. What price should she be willing to pay for the stock today?
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