FIN 534 Homework Set 3 – Strayer
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Goodman
Industries Landry
Incorporated Market Index
Year Stock Price Dividend Stock Price Dividend Includes Dividends
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
Directions: Answer the following questions
on a separate 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.
1. Use the data given to calculate 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 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 D1, D2, and D3, and then sum
these PVs.
8. If you plan to buy the stock, hold it
for 3 years, and then sell it for $27.05, what is the most you should pay for
it?
Use the following information for
Question 9:
Suppose
now that the Goodman Industries (1) trades at a current stock price of $30 with
a (2) strike price of $35. Given the following additional information: (3) time
to expiration is 4 months, (4) annualized risk-free rate is 5%, and (5)
variance of stock return is 0.25.
9. What is the price for a call option
using the Black-Scholes Model?
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