FIN 534 Week 6 Homework Set 3

FIN 534 – Homework Set#3


Directions: Answer the following questions on a separate document. Explain how you reached theansweror show your work if a mathematical calculation is needed, or both. Submit your assignment usingtheassignment link in the course shell. This homework assignment is worth 100points.


Use the following information for questions 1 through4:

The Goodman Industries’ and Landry Incorporated’s stock prices and dividends, along with theMarketIndex, are shown below. Stock prices are reported for December 31 of each year, and dividendsreflectthose paid during the year. The market data are adjusted to includedividends.


GoodmanIndustries                                                                  LandryIncorporated                                                                   MarketIndex


Year StockPrice Dividend StockPrice Dividend IncludesDividends
2013 $25.88 $1.73 $73.13 $4.50 17495.97
2012 22.13 1.59 78.45 4.35 13178.55
2011 24.75 1.50 73.13 4.13 13019.97
2010 16.13 1.43 85.88 3.75 9651.05
2009 17.06 1.35 90.00 3.38 8403.42
2008 11.44 1.28 83.63 3.00 7058.96


  1. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index,andthen calculate average annual returns for the two stocks and the index. (Hint: Remember,returnsare calculated by subtracting the beginning price from the ending price to get the capital gainorloss, adding the dividend to the capital gain or loss, and then dividing the result by thebeginningprice. Assume that dividends are already included in the index. Also, you cannot calculatetherate of return for 2008 because you do not have 2007data.)


  1. Calculate the standard deviations of the returns for Goodman, Landry, and the MarketIndex.(Hint: Use the sample standard deviation formula given in the chapter, which corresponds totheSTDEV function inExcel.)


  1. What dividends do you expect for Goodman Industries stock over the next 3 years if youexpectyou expect the dividend to grow at the rate of 5% per year for the next 3 years? In otherwords,calculate D1, D2, and D3. Note that D0 =$1.50.


  1. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premiumis5%. Assume that Goodman Industries’ stock, currently trading at $27.05, has a required returnof13%. You will use this required return rate to discount dividends. If you plan to buy the stock,holdit for 3 years, and then sell it for $27.05, what is the most you should pay forit?