Reference no: EM133115999
The management of Ark Industries wants to analyze the performance of the company's stock in the stock market. They want to compare the stock performance with Apex Inc, a strong competitor in the industry, and the market index. The following data is available for managerial finance analysis.
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Year
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Ark Industries
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Apex Incorporated
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Market Index
|
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Capital gain/loss
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Dividend
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Purchased Price
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Capital gain/loss
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Dividend
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Purchased
price
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Rate of Return
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2020
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$6.79
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$2.23
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$23.53
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$5.80
|
$3.52
|
$79.32
|
51.8%
|
|
2019
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-$5.08
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$2.65
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$28.61
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$5.00
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$3.65
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$74.32
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1.30%
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|
2018
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$13.40
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$2.73
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$15.21
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-$12.80
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$3.45
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$87.12
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11.90%
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2017
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$2.58
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$2.57
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$12.63
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-$8.00
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$3.47
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$95.12
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13.90%
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2016
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-$0.58
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$2.23
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$13.21
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$10.88
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$3.55
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$84.25
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15.80%
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*Capital gain = difference between ending price and beginning price
- Use the data given to calculate the annual returns for Ark Industries, and Apex Inc during the 5-year period.
- Calculate the historical average returns for Ark Industries, Apex Inc., and the market index during the 5-year period.
- Calculate the standard deviation of the returns for Ark Industries.
- An individual investor, James Bond needs an extra return of 6.0% before he will take on the stock market's risk to invest in Ark Industries. If the risk-free rate on long-term Treasury bonds is 5.0%. what would be the required return on the market?
- James Bond wants to determine the required rate of return on two stocks (stock A and stock
B) that he just added to his portfolio. The following information is available: Market rate of return = 11.0%
Risk free rate =5.0% Beta for stock A= 0.77 Beta for stock B = 0.99
Use the Security Market Line (SML) equation to calculate the required rate of return for stock A and stock B.
- Richard Morgan, another individual investor wants to purchase four stocks for his portfolio. The expected return, portfolio weights, and the betas of the stocks are given below:
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Stocks
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Beta
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Portfolio weight
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Expected return
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Goodman Industries
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0.70
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30%
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9.20%
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Renfro Inc.
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0.79
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20%
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9.74%
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Heath Inc.
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1.10
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30%
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11.60%
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Lincoln Inc.
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1.44
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20%
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13.64%
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-
- Calculate the portfolio beta.
- Calculate the portfolio's required return.
- Goodman Industries is expected to pay a $4.50 per share dividend at the end of this year (i.e., D1 = $4.50). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock is, rs, is 9.2%. What is the estimated value per share of Goodman stock?
- Renfro Inc. is expected to have free cash flow (FCF) of $105 million next year and an expected constant growth rate of 5% thereafter. The weighted average cost of capital (WACC) for the company is 9.0%. Using the constant growth model, estimate the value of operations for Renfro Inc.
- The most recent free cash flow (FCF) for Heath Inc. was $200 million, and the management expects the free cash flow to begin growing immediately at a 7% constant rate. The cost of capital is 12%.
- Using the constant growth model, determine the value of operations for Heath Inc.
Heath Inc. balance sheet shows that it has $10 million short-term investments, $15 million in notes payable, $60 million in long-term bonds, and $15 million in preferred stock. Heath has 60 million of shares outstanding. Calculate the following:
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- total intrinsic value for Heath Inc.
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- intrinsic value of equity for Heath Inc.
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- intrinsic stock price per share for Heath Inc.
- Distinguish between call option and put option.
The current price of a stock is $50. In 1 year, the price will be either $65 or $35. The annual risk- free rate is 5%. Find the price of a call option on the stock that has an exercise price of $55 and that expires in 1 year. (Hint: Use daily compounding.)
Submit your answers in a Word and/ or Excel document.
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