FIN 534 Week 6 Homework Set 3

FIN 534 Week 6 Homework Set 3

FIN 534 Homework Set #3

Use the following information for questions 1 through 4: 

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 Dividends 
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, 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

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. 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. 

4. Assume that Goodman Industries’ stock has a required return of 13%. You will
use this required return rate to discount the dividends calculated earlier. 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?
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