| HOMEWORK SET 3 |
| 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 | $1.00 | | $65.00 | $4.50 | | 17.49 | 5.97 |
| 2012 | 22.13 | 1.00 | | 65.00 | 4.35 | | 13.17 | 8.55 |
| 2011 | 24.75 | 1.00 | | 65.00 | 4.13 | | 13.01 | 9.97 |
| 2010 | 16.13 | 1.00 | | 65.00 | 3.75 | | 9.65 | 1.05 |
| 2009 | 17.06 | 1.00 | | 65.00 | 3.38 | | 8.40 | 3.42 |
| 2008 | 11.44 | 1.00 | | 65.00 | 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.) |
| | Goodman Industries | | | Landry Incorporated | | | Market Index |
| Year | Capital Gains | Total Return: Dividend + Capital Gains | Annual Return % | Capital Gains | Total Return: Dividend + Capital Gains | Annual Return % | Total Return | Annual Return % |
| 2013 | $3.75 | $4.75 | 21.46% | $0.00 | $4.50 | 6.92% | 4.32 | 32.80% |
| 2012 | (2.62) | (1.62) | -6.55% | 0.00 | 4.35 | 6.69% | 0.16 | 1.23% |
| 2011 | 8.62 | 9.62 | 59.64% | 0.00 | 4.13 | 6.35% | 3.36 | 34.82% |
| 2010 | (0.93) | 0.07 | 0.41% | 0.00 | 3.75 | 5.77% | 1.25 | 14.88% |
| 2009 | 5.62 | 6.62 | 57.87% | 0.00 | 3.38 | 5.20% | 1.35 | 19.15% |
| 2008 | - | - | - | - | - | - | - | - |
| Average Annual Return | | | 26.6% | | | 6.2% | | 20.6% |
| 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.) |
| | | | | Good- man | Landry | Market Index |
| | | | Standard Deviation of Returns | 31.1% | 0.7% | 13.8% | Excel's STDEV.S function used |
| 3. 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 |
| | Enter Growth Rate | Enter D0 | D1 | D2 | D3 |
| | 3.00% | $1.00 | $1.03 | $1.06 | $1.09 |
| 4. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is |
| 5%. Assume that Goodman Industries' stock, currently trading at $27.05, has a required return |
| of 13%. You will use this required return to discount the dividends (from No. 3 above). 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? |
| | | $2.50 | What is the Present Value of the Dividend Stream from No. 7 Above |
| | | $27.05 | At What Price Will You Sell the Stock in 3 Years |
| | | 13.00% | Required Return on Goodman Industries' Stock |
| | | $18.75 | Present Value of $27.05 Stock Price in 3 Years |
| | | $21.25 | Present Value of $27.05 Stock Price in 3 Years + Present Value of |
| | | | Stream of Dividends (this is the most that you should pay today). |
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1_new_hw_3_set_template.xlsx
