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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- 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
|
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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