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FIN 534 Week 6 Homework Set 3

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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 Incorporateds
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.
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.)
1.
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.)

1.
3.
Estimate Goodmans and Landrys
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 Excels SLOPE function.) Are these
betas consistent with your graph?
1.
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?
1.
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?
1.
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.
1.
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.
1.
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%, and (5) variance of

stock return is 0.25. 9. What is the price for a call


option using the Black-Scholes Model?