Problem Set #$3$

A$)$ The management of Jordan Industries wants to analyze the performance of the company's stock in the stock market. They want to compare the stock

performance with Johnson Inc, a strong competitor in the industry, and the market index. The following data is available for managerial finance analysis.

$*$Capital gain $=$ difference between ending price and beginning price

i$.$ Use the data given to calculate the annual returns for Jordan Industries, and Johnson Inc during the $5-$year period.

ii$.$ Calculate the historical average returns for Jordan Industries, Johnson Inc., and the market index during the $5-$year period.

B$)$ Jack Boyd, 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:

i$.$ Calculate the portfolio beta.

ii$.$ Calculate the portfolio's required return.

C$)$ Crater Industries is expected to pay a $$4\mathrm{.}75$ per share dividend at the end of this year $($i$.$e$.,$ D$1=$$$4\mathrm{.}75).$ The dividend is expected to grow at a constant rate of

$4\%$ a year. The required rate of return on the stock is $10\mathrm{.}2\%.$ What is the estimated value per share of Carter stock?

D$)$ Rohn Inc. is expected to have free cash flow $($FCF$)$ of $$125$ million next year and an expected constant growth rate of $6\%$ thereafter. The weighted average cost

of capital $($WACC$)$ for the company is $10\mathrm{.}0\%.$ Using the constant growth model, estimate the value of operations for Rohn Inc.

E$)$ The most recent free cash flow $($FCF$)$ for Hirst Inc. was $$220$ million, and the management expects the free cash flow to begin growing immediately at a $6\%$

constant rate. The cost of capital is $13\%.$ Using the constant growth model, determine the value of operations for Hirst Inc.

F$)$ Hirst Inc. balance sheet shows that it has $$15$ million short$-$term investments, $$20$ million in notes payable, $$65$ million in long$-$term bonds, and $$20$ million in

preferred stock. Hirst has $65$ million of shares outstanding. Calculate the following:

ii$.$ total intrinsic value for Hirst Inc.

iii. intrinsic value of equity for Hirst Inc.

iv$.$ intrinsic stock price per share for Hirst Inc.

G$)$ Distinguish between call option and put option.

H$)$ The current price of a stock is $$60.$ In $1$ year, the price will be either $$75$ or $$45.$ The annual risk$-$free rate is $5\%.$ Find the price of a call option on the stock that

has an exercise price of $$65$ and that expires in $1$ year. $($Hint: Use daily compounding.$)$