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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 $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 TreasuryPortfolio Rate of Return (%) bills) (%)
Treasury bills 3.8Treasury bonds 5.3 1.5Common 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.)
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