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$49. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of2.1%.Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are asfollows.Average AnnualRate of Return (%)Average Premium(Extra returnversus Treasurybills) (%)PortfolioTreasury billsTreasury bondsCommon stocks3.85.31.511.57.7a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.)Discount rateb. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2decimal places.)

Given information: Stock price is $49 Year-end dividend is $3.00 Risk free rate is 2.1%

Answered: Top hedge fund manager Sally Buffit…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section: Chapter Questions

Problem 1P

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I need someone to check my answer 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 $49. The stock will pay a divided at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.1% 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 What is the discount rate on the Stock? 7.7%+ 2.1% =9.8% What price should she be willing to pay for the stock today? Price= ($3.00 + $49)/ (1+0.098) = $47.36
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