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