Solution-Find what price should she be willing to pay for

Find what price should she be willing to pay for the stock

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Reference no: EM132567541

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 $48. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.2%.

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

PortfolioAverage 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

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.)

Reference no: EM132567541

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Find what price should she be willing to pay for the stock

Reference no: EM132567541

Reference no: EM132567541

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