Project #37225 - Financial management homework #2

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.

 

 

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

 

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% variance of stock return is 0.25.

 

 9. What is the price for a call option using the Black-Scholes Model?

Subject Mathematics
Due By (Pacific Time) 08/08/2014 12:00 am
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