Build A Model Using The Data To Calculate Annual Return

Build A Modela Use The Data Given To Calculate Annual Returns For Go

Build A Modela Use The Data Given To Calculate Annual Returns For Go

Build a Model 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 2015 because you do not have 2014 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. 2020 $30.32 $2.23 $85.12 $3.,475. $23.53 $2.65 $79.32 $3.,174. $28.61 $2.73 $74.32 $3.,019. $15.21 $2.57 $87.12 $3.,743. $12.63 $2.23 $95.12 $3.55 9,455. $13.21 $2.25 $84.25 $3.25 8,163.96 We now calculate the rates of return for the two companies and the index: Goodman Landry Index 2020 Kenneth D. Jackson: Change in stock price plus any dividends, divided by the previous stock price Average Note: To get the average, you could get the column sum and divide by 5, but you could also use the function wizard, fx. Click fx, then statistical, then Average, and then use the mouse to select the proper range. Do this for Goodman and then copy the cell for the other items. b. Calculate the standard deviation 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.) Use the function wizard to calculate the standard deviations. Goodman Landry Index Standard deviation of returns 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 .0% 0.0% 0.0% .0% 0.0% 0.0% .0% 0.0% 0.0% .0% 0.0% 0.0% .0% 0.0% 0.0% To make the graph, we first selected the range with the returns and the column heads, then clicked the chart wizard, then choose the scatter diagram without connected lines. That gave us the data points. We then used the drawing toolbar to make free-hand ("by eye") regression lines, and changed the lines color and weights to match the dots. 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? Goodman's beta = Landry' beta = e. The risk-free rate on long-term Treasury bonds is 8.04%. Assume that the market risk premium is 6%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns. Market risk premium (RPM) = 6.000% Risk-free rate = 8.040% Expected return on market = Risk-free rate + Market risk premium = + = Required return = Goodman: Required return = = Landry: Required return = = f. If you formed a portfolio that consisted of 60% Goodman stock and 40% Landry stock, what would be its beta and its required return? The beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio's beta would be: Portfolio beta = 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. Beta Portfolio Weight Goodman 30% Stock A 0.% Stock B 0.% Stock C 1.% 100% Portfolio Beta = Required return on portfolio: = Risk-free rate + Market Risk Premium Beta = = Question 1 The attached file contains hypothetical data for working this problem. Goodman Corporation’s and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown in the file. 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. 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 2015 because you do not have 2014 data.) b. Calculate the standard deviation 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.) c. On a stand-alone basis which corporation is the least risky? d. 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. e. 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? f. The risk-free rate on long-term Treasury bonds is 8.04%. Assume that the market risk premium is 6%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns. g. If you formed a portfolio that consisted of 60% of Goodman stock and 40% of Landry stock, what would be its beta and its required return? h. 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 30% of Goodman, 20% of Stock A, 30% of Stock B, and 20% of Stock C. Question 2 Quest Financial services balance sheets report $200 million in total debt, $100 million in short-term investments, and $30 million in preferred stock. Quest has 10 million shares of common stock outstanding. A financial analyst estimated that Quest’s value of operations is $1000 million. What is the analyst’s estimate of the intrinsic stock price per share? Question 3 Lincoln Incorporated is expected to pay a $4.5 per share dividend at the end of this year (i.e., D1 = $4.50). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock is, rs, is 12%. What is the estimated value per share of Boehm stock? Question 4 Assume that the average firm in Masters Corporation’s industry is expected to grow at a constant rate of 3% and that its dividend yield is 5%. Masters is about as risky as the average firm in the industry and just paid a dividend (D0) of $2.5. Analysts expect that the growth rate of dividends will be 25% during the first year (g0,1 = 25%) and 10% during the second year (g1,2 = 10%). After Year 2, dividend growth will be constant at 5%. What is the required rate of return on Masters’s stock? What is the estimated intrinsic per share? Question 5 Several years ago, Macro Riders issued preferred stock with a stated annual dividend of 5% of its $600 par value. Preferred stock of this type currently yields 10%. Assume dividends are paid annually. a. What is the estimated value of Macro’s preferred stock? b. Suppose interest rate levels have risen to the point where the preferred stock now yields 14%. What would be the new estimated value of Macro’s preferred stock? Question . Define each of the following terms: · Call option · Put option · Strike price or exercise price · Expiration date · Exercise value · Option price · Time value · Writing an option · Covered option · Naked option · In-the-money call · Out-of-the-money call · LEAPS 2. The current price of a stock is $50. In 1 year, the price will be either $65 or $35. The annual risk-free rate is 10%. Find the price of a call option on the stock that has an exercise price of $55 and that expires in 1 year. (Hint: Use daily compounding.) 3. The exercise price on one of Chrisardan Company’s call options is $20, its exercise value is $27, and its time value is $8. What are the option’s market value and the price of the stock? Submit your answers in a Word document.