Part -1:
a. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average returns over the five-year period. (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 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.)
| Data as given in the problem are shown below: |
|
|
|
Goodman Industries |
Landry Incorporated |
Market Index |
| Year |
Stock Price |
Dividend |
Stock Price |
Dividend |
Includes Divs. |
| 2013 |
$25.88 |
$1.73 |
$73.13 |
$4.50 |
17,495.97 |
| 2012 |
$22.13 |
$1.59 |
$78.45 |
$4.35 |
13,178.55 |
| 2011 |
$24.75 |
$1.50 |
$73.13 |
$4.13 |
13,019.97 |
| 2010 |
$16.13 |
$1.43 |
$85.88 |
$3.75 |
9,651.05 |
| 2009 |
$17.06 |
$1.35 |
$90.00 |
$3.38 |
8,403.42 |
| 2008 |
$11.44 |
$1.28 |
$83.63 |
$3.00 |
7,058.96 |
We now calculate the rates of return for the two companies and the index:
| |
Goodman |
Landry |
Index |
| 2013 |
|
|
|
| 2012 |
|
|
|
| 2011 |
|
|
|
| 2010 |
|
|
|
| 2009 |
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|
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|
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| Average |
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b. Calculate the standard deviation of the returns for Goodman, Landry, and the Market Index.
Use the function wizard to calculate the standard deviations.
c. Construct a scatter diagram graph that shows Goodman's and Landry' returns on the vertical axis and the Market Index's returns on the horizontal axis.
It is easiest to make scatter diagrams with a data set that has the X-axis variable in the left column, so we reformat the returns data calculated above and show it just below.
| Year |
Index |
Goodman |
Landry |
| 2013 |
0.0% |
0.0% |
0.0% |
| 2012 |
0.0% |
0.0% |
0.0% |
| 2011 |
0.0% |
0.0% |
0.0% |
| 2010 |
0.0% |
0.0% |
0.0% |
| 2009 |
0.0% |
0.0% |
0.0% |
d. Estimate Goodman's and Landry's betas as the slopes of regression lines with stock returns 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?
e. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns.
f. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would be its beta and its required return?
g. Suppose an investor wants to include Goodman Industries' stock in his or her portfolio. Stocks A, B, and C are currently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio's required return if it consists of 25% of Goodman, 15% of Stock A, 40% of Stock B, and 20% of Stock C.
Part -2:
Hamilton Landscaping's dividend growth rate is expected to be 30% in the next year, drop to 15% from Year 1 to Year 2, and drop to a constant 5% for Year 2 and all subsequent years. Hamilton has just paid a dividend of $2.50 and its stock has a required return of 11%.
a. What is Hamilton's estimated stock price today?
b. If you bought the stock at Year 0, what your expected dividend yield and capital gains for the upcoming year?
c. What your expected dividend yield and capital gains for the second year? Why aren't these the same as for the first year?