As a new loan officer in the Springfield Bank, you are comparing the financial riskiness of two firms. Using the selected information from pro forma statements for each firm attached, complete the following tasks:

1. Calculate the expected values of Equity Eddie's and Barry Borrower's net incomes.
2. Calculate the standard deviations of Equity Eddie's and Barry Borrower's net incomes.
3. Calculate the coefficients of variation of Equity Eddie's and Barry Borrower's net incomes.
4. Compare Equity Eddie's and Barry Borrower's degrees of financial risk, which firm do you prefer?
5. If you have 30 percent of your total investment in Equity Eddie's, with the expected income of your calculation from (1) and a standard deviation of your calculation from (2), and the remainder 30 percent in Barry Borrower's, with the expected income of your calculation from (1) and a standard deviation of your calculation from (2). The correlation coefficient is 0.6. Determine the expected income and standard deviation for this portfolio.

FINA 3320: Corporate Finance Project 2: Risk and Return Equity Eddie's Company Net Income Forecast (in 000's) Probability of Occurrence 5% 10% 70% 10% 5% Operating Income $100 $200 $400 $600 $700 Interest Expense 0 0 0 0 0 Before-Tax Income $100 $200 $400 $600 $700 Taxes (28%) $28 $56 $112 $168 $196 Net Income $72 $144 $288 $432 $504 Barry Borrower's Company Net Income Forecast (in 000's) Probability of Occurrence 5% 10% 70% 10% 5% Operating Income 110 220 440 660 770 Interest Expense 40 40 40 40 40 Before-Tax Income 70 180 400 620 730 Taxes (28%) 20 50 112 174 204 Net Income 50 130 288 446 526