Question details

15_FIN 534 Week 6 set 3 - GM
$ 12.00
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?
 
 
Available solutions