Question

In: Finance

Stock A: Stock B: Market Index Stock Price Dividend Stock Price Dividend 2016 $25.88 $1.73 $73.13...

Stock A: Stock B: Market Index
Stock Price Dividend Stock Price Dividend
2016 $25.88 $1.73 $73.13 $4.50 $17.09
2015 $22.93 $1.59 $78.45 $4.35 $13.27
2014 $24.75 $1.50 $73.13 $4.13 $13.01
2013 $16.13 $1.43 $85.88 $3.75 $9.96
2012 $17.16 $1.35 $90.00 $3.38 $8.40
2011 $11.44 $1.28 $86.33 $3.00 $7.05

1.Use the data given to calculate annual returns for Stock A, Stock B, 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 2011 because you do not have 2010 data.)

2. Calculate the standard deviations of the returns for Stock A, Stock B, 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 Stock A over the next three years if you expect the dividend to grow at the rate of 3% per year for the next three years? In other words, calculate D1, D2, and D3. Note that D0 = $1.50.

4. Assume that Stock A 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 three years, and then sell it for $27.05, what is the most you should pay for it?

Solutions

Expert Solution

1]

annual return = (current year stock price - previous year stock price + current year dividend) / previous year stock price

The annual returns, and the average annual returns are calculated as below :

2]

Standard deviations of the annual returns are calculated using STDEV function in Excel as below :

3]

D0 = $1.50

D1 = $1.50 * (1 + 3%)1 = $1.55

D2 = $1.50 * (1 + 3%)2 = $1.59

D3 = $1.50 * (1 + 3%)3 = $1.64

4]

The most to pay for stock = present value of 3 years dividends + present value of sale price after 3 years

The most to pay for stock = ($1.55 / 1.121) + ($1.59 / 1.122) + ($1.64 / 1.123) + ($27.05 / 1.123) = $23.07


Related Solutions

Stock A: Stock B: Market Index Stock Price Dividend Stock Price Dividend 2016 $25.88 $1.73 $73.13...
Stock A: Stock B: Market Index Stock Price Dividend Stock Price Dividend 2016 $25.88 $1.73 $73.13 $4.50 $17.09 2015 $22.93 $1.59 $78.45 $4.35 $13.27 2014 $24.75 $1.50 $73.13 $4.13 $13.01 2013 $16.13 $1.43 $85.88 $3.75 $9.96 2012 $17.16 $1.35 $90.00 $3.38 $8.40 2011 $11.44 $1.28 $86.33 $3.00 $7.05 Use the data given to calculate annual returns for Stock A, Stock B, and the Market Index, and then calculate average annual returns for the two stocks and the index. (Hint: Remember,...
There are two stocks in the market, Stock A and Stock B . The price of...
There are two stocks in the market, Stock A and Stock B . The price of Stock A today is $85. The price of Stock A next year will be $74 if the economy is in a recession, $97 if the economy is normal, and $107 if the economy is expanding. The probabilities of recession, normal times, and expansion are .30, .50, and .20, respectively. Stock A pays no dividends and has a correlation of .80 with the market portfolio....
There are two stocks in the market, Stock A and Stock B. The price of Stock...
There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $85. The price of Stock A next year will be $74 if the economy is in a recession, $97 if the economy is normal, and $107 if the economy is expanding. The probabilities of recession, normal times, and expansion are .30, .50, and .20, respectively. Stock A pays no dividends and has a correlation of .80 with the market portfolio. Stock...
Consider the following three stocks that constitute a stock market index. Stock Beginning Price Ending Price...
Consider the following three stocks that constitute a stock market index. Stock Beginning Price Ending Price # Shares (000s) X 25 27 10,000 Y 100 140 1,000 Z 1500 1700 200 Market-cap-weighted index and price-weighted indexes would be most sensitive to which of these stocks and why?
The market price of a stock is $22.74 and it just paid a dividend of $1.87....
The market price of a stock is $22.74 and it just paid a dividend of $1.87. The required rate of return is 11.80%. What is the expected growth rate of the dividend? Round to 2 decimal places. Also if, the market price of a stock is $24.46 and it is expected to pay a dividend of $1.48 next year. The required rate of return is 11.74%. What is the expected growth rate of the dividend? Also round to 2 decimal...
The market price of a stock is $23.39 and it just paid a dividend of $1.82....
The market price of a stock is $23.39 and it just paid a dividend of $1.82. The required rate of return is 11.17%. What is the expected growth rate of the dividend? round to 2 decimal places please..in percent form.
The market price of a stock is $43.33 and it just paid $5.41dividend. The dividend...
The market price of a stock is $43.33 and it just paid $5.41 dividend. The dividend is expected to grow at 3.22% forever. What is the required rate of return for the stock?
Two stocks, stock A and B, are available in the stock market. The price of the...
Two stocks, stock A and B, are available in the stock market. The price of the stock A today is $50. The price of stock A next year will be $40 if the economy is in a recession, $55 if the economy is normal, and $60 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.1, 0.8, and 0.1, respectively. Stock A pays no dividends and has a correlation of 0.8 with the market portfolio....
company dividend increase, share price does not change, but the market index keep increasing. How to...
company dividend increase, share price does not change, but the market index keep increasing. How to explain by signalling hypothesis?
6. A call option on a non-dividend-paying stock has a market price of $2.50. The stock...
6. A call option on a non-dividend-paying stock has a market price of $2.50. The stock price is $15, the exercise price is $13, the time to maturity is three months, and the risk-free interest rate is 5% per annum. What is the implied volatility?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT