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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 $59. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.6%.
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 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.)
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.)
A market has a linear demand schedule with a slope of -0.3. When price is £3, quantity sold is 30 units. Where does this demand schedule hit the price.
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Then show how a $1 stock price increase would have a neutral effect on the spread value. Discuss any limitations of this procedure
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