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 $45. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.5%.

Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2020 (figures in percent per year) are as follows.

Portfolio Average Annual Rate of Return (%) Average Premium (Extra return versus Treasury bills) (%)

Treasury bills 3.7

Treasury bonds 5.4 1.7

Common stocks 11.5 7.7

a. What is the discount rate on the stock?

Note: Enter your answer as a percent rounded to 2 decimal places.

b. What price should she be willing to pay for the stock today?