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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
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 $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, 1900-2020 (figures in percent per year) are as follows. Portfolio Treasury bills Treasury bonds Common stocks Average Premium (Extra Average Annual Rate of Return (%) return versus Treasury bills) (%) 3.7 5.4 11.5 1.7 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? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. a. Discount rate b. Stock price %
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