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| Directions: Answer the following questions on this document. Explain how you reached the answer | ||||||||||
| or show your work if a mathematical calculation is needed, or both. Submit your assignment using | ||||||||||
| the assignment link in the course shell. This homework assignment is worth 100 points. | ||||||||||
| Use the following information for questions 1 through 8: | ||||||||||
| The Goodman Industries’ and Landry Incorporated’s stock prices and dividends, along with the Market | ||||||||||
| Index, are shown below. Stock prices are reported for December 31 of each year, and dividends reflect | ||||||||||
| those paid during the year. The market data are adjusted to include dividends. | ||||||||||
| Goodman Industries | Landry Incorporated | Market Index | ||||||||
| Year | Stock Price | Dividend | Stock Price | Dividend | Includes | Divi- dends | ||||
| 2013 | $25.88 | $1.73 | $73.13 | $4.50 | 17.49 | 5.97 | ||||
| 2012 | 22.13 | 1.59 | 78.45 | 4.35 | 13.17 | 8.55 | ||||
| 2011 | 24.75 | 1.50 | 73.13 | 4.13 | 13.01 | 9.97 | ||||
| 2010 | 16.13 | 1.43 | 85.88 | 3.75 | 9.65 | 1.05 | ||||
| 2009 | 17.06 | 1.35 | 90.00 | 3.38 | 8.40 | 3.42 | ||||
| 2008 | 11.44 | 1.28 | 83.63 | 3.00 | 7.05 | 8.96 | ||||
| 1. Use the data given to calculate the annual returns for Goodman, Landry, and the Market Index, and | ||||||||||
| then calculate average annual returns for the two stocks and the index. (Hint: Remember, returns | ||||||||||
| are calculated by subtracting the beginning price from the ending price to get the capital gain or | ||||||||||
| loss, adding the dividend to the capital gain or loss, and then dividing the result by the beginning | ||||||||||
| price. Assume that dividends are already included in the index, Also, you cannot calculate the | ||||||||||
| rate of return for 2008 because you do not have 2007 data.) | ||||||||||
| 2. Calculate the standard deviations of the returns for Goodman, Landry, and the Market Index. | |||||||
| (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the | |||||||
| STDEV function in Excel.) | |||||||
| 3. Estimate Goodman’s and Landry’s betas as the slopes of regression lines with stock return on the | ||||
| vertical axis (y-axis) and market return on the horizontal axis (x-axis). (Hint: Use Excel’s SLOPE | ||||
| function.) Are these betas consistent with your graph? | ||||
| 4. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is | |||||||||||||||||||||||||||||
| 5%. What is the required return on the market using the SML equation? | |||||||||||||||||||||||||||||
| 5. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would | |||||||||||||||||||||||||||||
| be its beta and its required return. | |||||||||||||||||||||||||||||
| 6. What dividends do you expect for Goodman Industries stock over the next 3 years if you expect the | |||||||||||||||||||||||||||||
| dividend to grow at the rate of 5% per year for the next 3 years? In other words, calculate | |||||||||||||||||||||||||||||
| D1, D2, and D3. Note that D0 = $1.50 | |||||||||||||||||||||||||||||
| 7. Assume that Goodman Industries’ stock, currently trading at $27.05, has a required return of 13%. | |||||||||||||||||||||||||||||
| You will use this required return rate to discount dividends. Find the present value of the | |||||||||||||||||||||||||||||
| dividend stream, that is, calculate the PV of D!, D2, and D3, and then sum these PVs. | |||||||||||||||||||||||||||||
| 8. If you plan to buy the the stock, hold it for 3 years, and then sell it for $27.05, what is the | |||||||||||||||||||||||||||||
| most you should pay for it? | (Problem 7-19) | ||||||||||||||||||||||||||||
| Use the following information for Question 9: | |||||||||||||||||||||||||||||
| Suppose now that the Good Industries (1) trades at a current stock price of $30 with a (2) strike price | |||||||||||||||||||||||||||||
| of $35. Given the following information: (3) time to expiration is 4 months, (annualized risk-free rate | |||||||||||||||||||||||||||||
| is 5%, and (5) variance of stock return is .25. | |||||||||||||||||||||||||||||
| 9. What is the price for a call option using the Black-Scholes model? | |||||||||||||||||||||||||||||
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