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Average rates of return on treasury bills

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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 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, 1900-2017 (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 9.60%

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.)

Stock price_________________

Reference no: EM132494246

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