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FINE 3100 Chapter 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

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limegoldfish227
4 Nov 2016
School
York University
Department
Finance
Course
FINE 3100
Professor
all

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Document Summary

Chapter 11: introduction to risk, return, and the opportunity cost of capital. Dividend yield: dividend / initial share price: dividend yield = 1. 50 / 50 = 0. 03 or 3% Percentage capital gain: capital gain / initial share price: percentage capital gain = 0. 3 or 30% Total return = 0. 03% + 0. 3% = 0. 33% Converting from a nominal to a real rate of return: 1 + real rate of return = (1 + nominal rate of return) / (1 + inflation rate) Market index: measure of the investment performance of the overall market. Canadian market indexes: s&p/tsx composite index: index of the investment performance of a portfolio of the major stocks listed on the toronto stock exchange. Formerly called the tse 300: s&p/tsx composite total return index: measure of the composite index based on the prices plus dividends paid by the stocks in the s&p/tsx composite index.

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Related Questions

Directions: 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. The project has to be done in Excel so that the instructor knows how the work has been done, step by step. Use the following information for questions 1 through 4: The Goodman Industries and Landry Incorporated as 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

Included dividends

2013

25.88

1.73

73.13

4.5

17495.97

2012

22.13

1.59

78.45

4.35

13178.55

2011

24.75

1,5

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.)Â


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.)Â


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.Â


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?

Please share the excel file using google docs.Thanks

Directions: 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. The project has to be done in Excel so that the instructor knows how the work has been done, step by step. Use the following information for questions 1 through 4: The Goodman Industries and Landry Incorporated as 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 Included dividends 2013 25.88 1.73 73.13 4.5 17495.97 2012 22.13 1.59 78.45 4.35 13178.55 2011 24.75 1,5 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?

Exam 2 (Ch.4-6) - Optional Extra Credit Due Date: 4/25/2016 Rule: Complete the following 4 problems and each one is worth 50 points. The adjusted points will be the average of your extra credit and your original total scores if any improvement score exists. 1. Suppose you purchase 2,000 shares of a closed-end mutual fund at its initial public offering; the offer price is $15 per share. The offering prospectus discloses that the fund promoter gets a 7.5 percent fee from the offering. If this fund sells at a 5 per cent discount to NAV the day after the initial public offering, what is the value of your investment? 2. Suppose the following three defense stocks are to be combined into a stock index in January 2013 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance): a. Calculate the initial value of the index if a price-weighting scheme is used. b. What is the rate of return on this index for the year ending December 31, 2013? For the year ending December 31, 2015? 3. The dividend for Douglas, Inc., is currently $1.25 per share. It is expected to grow at 20 percent next year and then decline linearly to a 5 percent perpetual rate beginning in four years. If you require a 16 percent return on the stock, what is the most you would pay per share? 4. Mid-American stock has a sustainable growth rate of 8 percent, ROE of 15 percent, and dividends per share of $1.65. If the P/E ratio is 20, what is the value of a share of stock?

Gemini Corp is a publicly traded corporation, with both its bonds and common equity shares traded in the open market.

Gemini estimates its WACC, based on the following financial market situations:

Applicable federal plus state tax rate: 40%

Bond market data:

The bonds issued by Gemini on average are currently traded at 94.96 percent of par (settlement date: Apr-12-2017), with coupon rate of 2.950%, semi-annual coupon frequency, and maturity date is Dec-15-2025;

The market value of Gemini’s “total (long-term) debt” is currently $19.67 Billion.

Stock market data:

The most current stock price for Gemini is $50.78 per share;

The most current dividend rate for Gemini is $1.00 per share;

The most current annual net income for Gemini amounts to $7.5 million;

The most current annual depreciation for Gemini amounts to $2.5 million;

The number of common equity shares outstanding for Gemini is 5 million shares;

The long-term dividend growth rate (5-Year annual avg.) for Gemini is 3.52%;

The historical market risk “Beta” for Gemini is 0.25;

The return for US S&P-500 stock market index is 11.42% per year between Years 1928 and 2016;

The “risk-free” return for US Treasury-bonds is 5.18% per year between Years 1928 and 2016;

The “market cap” (i.e., market value of common equity capitalization) for Gemini is currently $24.77 Billion;

Gemini has never issued any preferred stocks so far.

QUESTIONS:

What is the estimated amount of “cost of debt before tax” for Gemini Corp?

What is the estimated amount of “cost of common equity” for Gemini Corp?

What is the estimated amount of WACC for Gemini Corp?

For capital budgeting purpose, should this WACC calculated as above be used to discount those cash flows in real purchasing power terms (deflated), or instead to discount those cash flows in nominal terms (inflated)?

Gemini is evaluating an investment project with no extra risk being involved, the initial CF0 = -$10,000,000, for the following 8 years CF1 through CF8 = +$1,350,000 per year, and all these given CFs are in real purchasing power terms (deflated).What will be the appropriate NPV $ amount of this project to Gemini?