What is the discount rate on stock

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Question - Top hedge fund manager Sally Buffet believes that a stock with the same market risk as the S&P 500 will set at the year-end at a price of $43. The stock will pay a dividend at the year-end of $300. Assume that risk-free Treasury securities currently offer an interest rate of 1.8%.

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

Required -

1. What is the discount rate on stock?

2. What price should she be willing to pay for the stock today?

Reference no: EM133080274

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