finance- The Goodman Industries’ and Landry Incorporated’s stock prices

QUESTION

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.

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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 hold it for 3 years, and then sell it
for $27.05, what is the most you should pay for it?

ANSWER:

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