I am having difficulty with this question. How do I calculate the discount rate on this stock?
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 dividend 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, 1900-2015 (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 11.4 7.6
What is the discount rate on the stock?