Top hedge fund manager Sally Buffit believes that a stock with the same market risk as...
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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 $41. The stock will pay a dividend at year-end of $2.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.6%. 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 (%) 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) (%) % 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.) 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 $41. The stock will pay a dividend at year-end of $2.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.6%. 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 (%) 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) (%) % 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.)
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Answer rating: 100% (QA)
a The discount rate on the stock can be calculated using the Capital Asset Pricing Model CAPM Discou... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-1259722615
9th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus
Posted Date:
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