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 $43. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.8%. Average rates of return on Treasury bills, government bonds, and common stocks
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?
What price should she be willing to pay for the stock today?