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 $4.50 17495.97

2012 22.13 1.59 78.45 4.35 13178.55

2011 24.75 1.50 73.13 4.13 13019.97

2010 16.13 1.43 85.88 3.75 9651.05

2009 17.06 1.35 90.00 3.38 8403.42

2008 11.44 1.28 83.63 3.00 7058.96

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 stock, hold it for 3

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

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