FIN 534 Homework Set 3 2015 Strayer University All Rights Re
Fin 534 Homework Set 3 2015 Strayer University All Rights Reserve
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. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points. 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.
Goodman Industries Landry Incorporated Market Index Year Stock Price Dividend Stock Price Dividend Includes Dividends 2013 $25.88 $1.73 $73.13 $4.13 2014 $27.59 $1.59 $78.45 $4.75 2015 $28.36 $1.50 $73.13 $4.13 2016 $27.46 $1.43 $85.88 $3.06 2017 $29.00 $1.35 $90.00 $3.44 2018 $27.90 $1.28 $83.63 $3.00
Paper For Above instruction
This report provides comprehensive answers to the specified financial analysis questions based on the provided market data of Goodman Industries, Landry Incorporated, and the Market Index from 2013 to 2018. The calculations include annual returns, average returns, standard deviations, dividend projections, and valuation based on required return estimates.
1. Calculation of Annual Returns and Average Returns
To compute the annual returns for Goodman Industries, Landry Incorporated, and the Market Index, we use the formula:
Return = (Ending Price + Dividends - Beginning Price) / Beginning Price
Note that dividends are included in the index, so for individual stocks, the dividend payments are added separately. For the Market Index, dividends are incorporated in the index value, so they do not need to be added separately for the return calculation.
Goodman Industries Returns:
- 2014: (27.59 + 1.59 - 25.88) / 25.88 = (29.18 - 25.88) / 25.88 ≈ 0.1267 or 12.67%
- 2015: (28.36 + 1.50 - 27.59) / 27.59 = (29.86 - 27.59) / 27.59 ≈ 0.0823 or 8.23%
- 2016: (27.46 + 1.43 - 28.36) / 28.36 = (28.89 - 28.36) / 28.36 ≈ 0.0195 or 1.95%
- 2017: (29.00 + 1.35 - 27.46) / 27.46 = (30.35 - 27.46) / 27.46 ≈ 0.1050 or 10.50%
- 2018: (27.90 + 1.28 - 29.00) / 29.00 = (29.18 - 29.00) / 29.00 ≈ 0.0062 or 0.62%
Landry Incorporated Returns:
- 2014: (78.45 + 4.75 - 73.13) / 73.13 = (83.20 - 73.13) / 73.13 ≈ 0.1399 or 13.99%
- 2015: (73.13 + 4.13 - 78.45) / 78.45 = (77.26 - 78.45) / 78.45 ≈ -0.0150 or -1.50%
- 2016: (85.88 + 3.06 - 73.13) / 73.13 = (88.94 - 73.13) / 73.13 ≈ 0.2164 or 21.64%
- 2017: (90.00 + 3.44 - 85.88) / 85.88 = (93.44 - 85.88) / 85.88 ≈ 0.0892 or 8.92%
- 2018: (83.63 + 3.00 - 90.00) / 90.00 = (86.63 - 90.00) / 90.00 ≈ -0.0362 or -3.62%
Market Index Returns:
- 2014: (78.45 - 73.13) / 73.13 = 5.32 / 73.13 ≈ 0.0728 or 7.28%
- 2015: (73.13 - 78.45) / 78.45 = -5.32 / 78.45 ≈ -0.0678 or -6.78%
- 2016: (85.88 - 73.13) / 73.13 = 12.75 / 73.13 ≈ 0.1743 or 17.43%
- 2017: (90.00 - 85.88) / 85.88 = 4.12 / 85.88 ≈ 0.0480 or 4.80%
- 2018: (83.63 - 90.00) / 90.00 = -6.37 / 90.00 ≈ -0.0708 or -7.08%
Next, calculate the average annual returns for each.
Average Goodman Return: (12.67 + 8.23 + 1.95 + 10.50 + 0.62) / 5 ≈ 6.99%
Average Landry Return: (13.99 - 1.50 + 21.64 + 8.92 - 3.62) / 5 ≈ 7.487%
Average Market Return: (7.28 - 6.78 + 17.43 + 4.80 - 7.08) / 5 ≈ 3.127%
2. Calculation of Standard Deviations of Returns
Using the sample standard deviation formula, the deviations from the mean for each return are squared, summed, divided by n-1, and square-rooted.
Goodman Industries Standard Deviation:
- Returns: 12.67%, 8.23%, 1.95%, 10.50%, 0.62%
- Mean ≈ 6.99%
- Calculations yield an SD of approximately 4.88%
Landry Incorporated Standard Deviation:
- Returns: 13.99%, -1.50%, 21.64%, 8.92%, -3.62%
- Mean ≈ 7.49%
- SD ≈ 9.76%
Market Index Standard Deviation:
- Returns: 7.28%, -6.78%, 17.43%, 4.80%, -7.08%
- Mean ≈ 3.13%
- SD ≈ 8.05%
3. Predicting Dividends for Next 3 Years with 5% Growth
D0 = $1.50. The dividends grow at 5% annually. Future dividends are calculated by:
D1 = D0 × (1 + g) = $1.50 × 1.05 = $1.575
D2 = D1 × 1.05 = $1.575 × 1.05 ≈ $1.65375
D3 = D2 × 1.05 ≈ $1.65375 × 1.05 ≈ $1.73644
4. Valuation of the Stock Using Required Return
The stock is valued using the dividend discount model (DDM):
P = (D1 / (r - g)) + (Pₙ / (1 + r)ⁿ)
Where:
- D1 = $1.575 (next year's dividend)
- r = 13% (required return)
- g = 5% (growth rate)
- Pₙ = sale price after 3 years = $27.05
Calculating the present value of dividends:
P₀ = D1 / (r - g) = $1.575 / (0.13 - 0.05) = $1.575 / 0.08 ≈ $19.69
Present value of the sale price:
PV of Pₙ = $27.05 / (1 + 0.13)³ ≈ $27.05 / 1.442 ≈ $18.75
The most one should pay for the stock today = PV of dividends + PV of sale price ≈ $19.69 + $18.75 ≈ $38.44
Therefore, the maximum price justified based on the required return and expected sale price is approximately $38.44.
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