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The opp The opp ites Tools Help Energy Bank of America Health A- a Ally Auto Finance Vehicle", a water RLog In Access Managers..-Naient RCastlight a CitiMortgag - Help Sas 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 $48. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.2% Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2015 (figures in percent per year) are as Average Premium Average Annual (Extra return Rate of Return versus Treasury bills) Portfolio Treasury bills Treasury bonds (%) 3.8 5.3 11.4 1.5 7.6 stocks What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) 1 of 4EE Next>

Explanation / Answer

AVerage premium compared to Treasury Bills=7.6%
Current Treasury Bills rate=2.2%
Hence, Average annual return for common stocks=2.2%+7.6%=9.8%
As, the particular stock is having the same risk as S&P500, it should have a discount rate of 9.8%

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