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 $45. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.5%.
Average rates of return on Treasury bills, government bonds, and common stocks, 1900â2013 (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 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 $
| 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 $45. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.5%. |
| Average rates of return on Treasury bills, government bonds, and common stocks, 1900â2013 (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 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 | $ |
Related questions
| Floyd Industries stock has a beta of 1.20. The company just paid a dividend of $.50, and the dividends are expected to grow at 6 percent per year. The expected return on the market is 11 percent, and Treasury bills are yielding 5.2 percent. The most recent stock price for Floyd is $69. |
| a. | Calculate the cost of equity using the DDM method. (Round your answer to 2 decimal places. (e.g., 32.16)) |
| DCF method | % |
| b. | Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16)) |
| SML method | % |
