**15_FIN 534 Week 6 set 3 - GM**

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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. |

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 Prices Dividend Stock Price Dividend Includes Dividend |

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 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 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? |

**Category:**Business, General Business

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