Top hedge fund manager Diana Sauros believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $56. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.9%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2013 (figures in percent per year) are as follows. Portfolio Avg Annual Rate Average Premium (extra return of Return versus treasury bills) Treasury bills 3.9 Treasury 5.2 Bonds Common Stocks 11.5 1.3 7.6 What is the discount rate if the interest rate is 4.0% ? (Enter your answer as a percent rounded to 2 decimal places.) Discount rate 6=? What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock price $ =?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Top hedge fund manager Diana Sauros believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of
$56. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.9%.
Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2013 (figures in percent per year) are as
follows.
Portfolio
Avg Annual Rate Average Premium (extra return
of Return
versus treasury bills)
Treasury bills 3.9
Treasury
Bonds
Common
Stocks
5.2
11.5
1.3
7.6
What is the discount rate if the interest rate is 4.0% ? (Enter your answer as a percent rounded to 2 decimal places.) Discount rate % = ?
What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal
places.) Stock price $ =?
Transcribed Image Text:Top hedge fund manager Diana Sauros believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $56. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.9%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2013 (figures in percent per year) are as follows. Portfolio Avg Annual Rate Average Premium (extra return of Return versus treasury bills) Treasury bills 3.9 Treasury Bonds Common Stocks 5.2 11.5 1.3 7.6 What is the discount rate if the interest rate is 4.0% ? (Enter your answer as a percent rounded to 2 decimal places.) Discount rate % = ? What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock price $ =?
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