566 words - 3 pages

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

Portfolio

Goodman Landry

1. Calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average annual returns for the two stocks and the index. Year Goodman Industries Landry Incorporated Market Index 0.5 0.5

2013 25% -1% 78% 11.9%

2012 -4% 13% 67% 4.5%

2011 63% -10% 138% 26.4%

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04%. Assume that the market risk premium is 5%. What is the required return on the market using the SML equation? ri = rRF + bi*(rM - rRF) rRF = 6.04% rM = 5.00%

Goodman Industries Landry Incorporated

5.49% 6.17%

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? beta= 0.201517875

Portfolio

5.83%

D0 D1 D2 D3

6. What dividends do you expect for Goodman Industries stock over the next 3 years if you expect dividend to grow at 6% annually? In other words, calculate D1, D2, and D3. Note that D0 = $1.50. 6% 1.50 1.59 1.69 1.79

0 1 2 3

7. Assume now that Goodman Industries’s 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. 13% 3.97 1.41 1.32 1.24

8. 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? $18.75 27.05

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

Stock Price Strike price time to expiration rRF = Variance

9. What is the price for a call option using the Black-Scholes Model? 30 35 4 0.05 0.25

0.333333333 0.5

d1 -0.331921025 -0.15415068 0.058333333 0.288675135

d2 -0.620596159

N(d1) Nd2) ert

VC = $1.89 0.369974447 0.267432684 0.983471

11.09923341 9.205434357

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