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 $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 rate of return on Treasury bills, government bonds, and common stocks, 1900-2015 (figure in percent per year) are as follows:

Average Premium

Average Annual (Extra Return versus

Portfolio Rate of Return % Treasury Bills)%

Treasury Bills 3.8

Treasury Bonds 5.3 1.5

Common stocks 11.4 4.6

a) What is the discount rate of the stock?

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