FIN 534 Homework 3 Set 1
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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. | |||||||||
YOU MUST ENTER CORRECT INFORMATION IN THE YELLOW-CODED CELLS | |||||||||
DO NOT TOUCH THE NON-YELLOW-CODED CELLS | |||||||||
ANSWERS ARE IN THE RED-BORDERED CELLS | |||||||||
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? | |||||||||||||||||||||||||||||