Reference no: EM132578449

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 $44. The stock will pay a dividend at year-end of $2.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.9%.

Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows.

                                                   Average Premium
                                                                (Extra return

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

Treasury bills           3.8
Treasury bonds        5.3                         1.5
Common stocks         11.5                        7.7

Question a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.

Question 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.)