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Find discount rate on the stock

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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.)

Reference no: EM132646992

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