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 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
Incorporated
Landry
Market Index
Year
Price
Stock Price
Dividend
2013
$25.88
17.49
Dividend
Stock
Includes
Dividends
$1.73
$73.13
$4.50
5.97
2012
22.13
8.55
1.59
78.45
4.35
13.17
2011
24.75
9.97
1.50
73.13
4.13
13.01
2010
16.13
1.05
1.43
85.88
3.75
9.65
2009
17.06
3.42
1.35
90.00
3.38
8.40
2008
11.44
8.96
1.28
83.63
3.00
7.05
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 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?
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?