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.
- 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.
Extracted text: A C D F 1 2 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 5 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.) 4 7 8 Data as given in the problem are shown below: 9. Goodman Industries Landry Incorporated Market Index 10 Year Stock Price Dividend Stock Price Dividend Includes Divs. $30.32 $2.23 $2.65 $2.73 $2.57 $2.23 $2.25 $85.12 $79.32 $74.32 $87.12 $95.12 $84.25 $3.52 $3.65 $3.45 $3.47 $3.55 $3.25 11 2020 18,475.97 12,174.55 12,019.97 10,743.05 9,455.42 8,163.96 2019 $23.53 $28.61 $15.21 $12.63 $13.21 12 13 2018 14 2017 15 2016 16 2015 17 18 We now calculate the rates of retun for the two companies and the index: 19 20 Goodman Landry Index 21 2020 22 2019 23 2018 24 2017 25 2016 26 27 Average 28 29 Note: To get the average, you could get the column sum and divide by 5, but you could also use the function 30 wizard, fx. Click fx, then statistical, then Average, and then use the mouse to select the proper range. Do this for 31 Goodman and then copy the cell for the other items. 32
Extracted text: A В C E F G 87 e. The risk-free rate on long-term Treasury bonds is 8.04%. Assume that the market risk premium is 6%. What is the 88 expected return on the market? Now use the SML equation to calculate the two companies' required returns. 89 90 Market risk premium (RPm) = 6.000% 91 Risk-free rate 8.040% 92 93 Expected return on market = Risk-free rate Market risk premium + 94 + %3D 95 96 97 Required retum 98 99 Goodman: 100 Required return %3D 101 %3D 102 103 Landry: 104 Required return = 105 %3D 106 107