**Title: Understanding Discount Rates and Average Returns****Introduction:**In this educational section, we explore the concept of discount rates in the context of stock investments and examine historical average rates of return for various financial instruments.**Scenario:**A top hedge fund manager, Sally Buffitt, believes that a stock with the same market risk as the S&P 500 will sell at year-end for $50. The stock will also pay a $2 dividend at this time. It is assumed that risk-free Treasury securities offer an interest rate of 2%.**Historical Data:**The table below illustrates average rates of return on Treasury bills, government bonds, and common stocks from 1900 to 2017, with figures represented as percentages per year:| 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 |**Question:**a. What is the discount rate on the stock? (Please enter your answer as a percent rounded to two decimal places.)*The discount rate box is provided for input.***Explanation:**The discount rate is a critical financial metric that helps determine the present value of expected future cash flows. In this example, understanding the appropriate discount rate for the stock is essential to calculate its fair valuation based on expected dividends and market risk.For further information on calculating discount rates and their implications, please refer to additional resources available on our website.

Given information: Risk free rate is 2% Average premium is 7.7% Stock price is $50 Year-end…

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 $50. The stock will pay a dividend at year end of $2. Assume that risk-free Treasury securities currently offer an interest rate of 2%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows. Average Annual Rate of Return Average Premium (Extra return vernus Treasury Portfolio (8) 3.0 5.3 11.5 bills) () Treasury billa Treasury bonda Common atocks 1.5 7.7 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Discount rate %

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 $50. The stock will pay a dividend at year end of $2. Assume that risk-free Treasury securities currently offer an interest rate of 2%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows. Average Annual Rate of Return Average Premium (Extra return vernus Treasury Portfolio (8) 3.0 5.3 11.5 bills) () Treasury billa Treasury bonda Common atocks 1.5 7.7 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Discount rate %

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

Section: Chapter Questions

Problem 1PS

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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 $42. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.7%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2017 (figures in percent per year) are as follows. Portfolio Average AnnualRate of Return (%) Average Premium (Extra returnversus 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.)
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You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $1.50 a share at the end of the year (D1 = $1.50) and has a beta of 0.9. The risk-free rate is 5.7%, and the market risk premium is 4.0%. Justus currently sells for $28.00 a share, and its dividend is expected to grow at some constant rate, g. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years?
You have been asked to calculate the required return for a stock that you are considering investing in. You recently looked up the risk-free rate (as measured by Treasury bonds) and found it to be 1%. You also looked up the current market return of the S&P 500 and found it to be 12. If the firm has a beta of 1.2, what is its required return?
You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $1.75 a share at the end of the year (D1 = $1.75) and has a beta of 0.9. The risk-free rate is 4.6%, and the market risk premium is 5.5%. Justus currently sells for $31.00 a share, and its dividend is expected to grow at some constant rate, g. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years? (That is, what is ?) Round your answer to two decimal places. Do not round your intermediate calculations. $ fill in the blank 2
Please explain using Excel and show/explain formulas. Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio’s expected annual rate of return is 8%, and the annual standard deviation is 10%. Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor’s 500 index. The index has an expected return of 13%, and its standard deviation is 14%. a. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 3%. multiple choice Yes No b. Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +0.3. multiple choice Yes No
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 $48. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.2%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows. Portfolio Treasury bills Treasury bonds. Common stocks Discount rate Average Annual Rate of Return (8) 3.8 5.3 11.5 Stock price a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Average Premium (Extra return versus Treasury bills) (8) % 1.5 7.7 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.)
Currently the S&P is returning 11% while Treasury bonds are returning 2%. If a stock has a beta of 1.3 and an expected return of 7%, what is the required return for this stock?
Use the data in the tables below to answer the following questions: Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017. Average Premium Portfolio Treasury bills Treasury bonds Common stocks Average Annual Rate of Return (%) (Extra return versus Treasury bills) (%) 3.8 5.3 11.5 1.5 7.7 Standard deviation of returns, 1900-2017. Standard Portfolio Deviation (%) Treasury bills 2.9 Long-term government bonds 9.0 Common stocks 19.7 a. What was the average rate of return on large U.S. common stocks from 1900 to 2017? b. What was the average risk premium on large stocks? c. What was the standard deviation of returns on common stocks? (Enter your answer as a percent rounded to 1 decimal place.) a. Average rate of return 11.5 % b. Average risk premium 7.7 % C. Standard deviation of returns 19.7 %
If the stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2 percent, the growth rate of dividends is 1 percent and the current level of dividends is $70, use the dividend-discount model to compute the level of the S&P 500 that is warranted by the fundamentals. Compare the result to the current S&P 500 level of 4300, and explain one possible reason for the difference.
A share of stock with a beta of 1.20 now sells for 55. Investors expect the stock to pay a year-end dividend of 2.90. The T-bill rate is 7 percent, and the market risk premium is 8 percent. If the stock is perceived to be fairly priced today,What must be investors’ expectations of the price of the stock at the end of the year?
Stock Z has a beta of 2 and an expected return of 10%. If Treasury Bills currently return 1% and the expected return on the S&P 500 is 7%, is this stock correctly priced, underpriced, or overpriced? Graph the security market line and Stock Z. Label all relevant details. What does beta represent? Explain the concept of market efficiency using your graph

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