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1 September, 03:30

If Professor Siegel is correct that stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2.5 percent, the growth rate of dividends is 1 percent and the current level of dividends is $70, use the dividend-discount model to compute the level of the S

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  1. 1 September, 03:37
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    If Professor Siegel is correct that stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2.5 percent, the growth rate of dividends is 1 percent and the current level of dividends is $70, use the dividend-discount model to compute the level of the S&P 500 that is warranted by the fundamentals.

    Instruction: Round your response to 2 decimal places.

    The level of the S&P 500 is

    Answer:

    Dividend discount model:

    Price = D (1+g) / r-g

    g=growth rate 1%

    r = as given in question risk free rate 2.5%

    D₀ = $70

    D₁=$70 (1+0.01) with growth rate

    Solution:

    70 (1+0.01) / (0.025-0.01)

    =$4713.33
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