# 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

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. 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?

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

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. 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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