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?      

 

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