Top hedge fund manager Diana Sauros
Question
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 $53. The stock will pay a dividend at year-end of $2.30. Assume that risk-free Treasury securities currently offer an interest rate of 2.3%.
Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2013 (figures in percent per year) are as follows.
| Portfolio | Average Annual Rate of Return | Average Premium (Extra return versus Treasury bills) | |||
| Treasury bills | 3.9 | ||||
| Treasury bonds | 5.2 | 1.3 | |||
| Common stocks | 11.5 | 7.6 |
| What is the discount rate on the stock? (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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