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 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.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 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?
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.
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?