FIN 534 Homework Set # 3

FIN 534 Homework Set # 3

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.

Use the following information for questions 1 through 8:

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                               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 Goodman’s and Landry’s 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 Excel’s 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?

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