FIN 534 Homework Set 3

FIN 534 Homework Set 3

Use the following information for questions 1 through 4:

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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.

2. Calculate the standard deviations of the returns for Goodman, Landry, and the Market Index.

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?