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

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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  1. 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

 

  1. What is the discount rate on the Stock?

7.7%+ 2.1% =9.8%

  1. 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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