Foundations of Financial Management

Block, Hirt, Danielson and Short: $12$ce

Problem $13-27$

$25.$ Transoceanic Airlines is examining a resort motel chain to add to its operations. Before the acquisition, the normal expected outcomes for the firm were as follows:

Outcomes $($$ millions$)$ Probability

Recession $$300\mathrm{.}3$ $$92021$

Normal economy $500\mathrm{.}4$ $$50$

Strong economy $700\mathrm{.}3$

After the acquisition the expected outcomes for the firm would be

Outcomes $($$ millions$)$ Probability

Recession $$100\mathrm{.}3$

Normal economy $500\mathrm{.}4$

Strong economy $1000\mathrm{.}3$

a$.$ Compute the expected value, standard deviation, and coefficient of variation before the acquisition.

After the acquisition these values are as follows:

Expected value $53\mathrm{.}0($$ millions$)$

Standard deviation $34\mathrm{.}9($$ millions$)$

Coefficient of variation $0\mathrm{.}658$

b$.$ Comment on whether this acquisition appears desirable to you.

c$.$ Do you think the firm$$s share price is likely to go up as a result of this acquisition?

d$.$ If the firm was interested in reducing its risk exposure, which of the following three industries would you advise it to consider for an acquisition? Briefly comment on your answer.

i$.$Major travel agency

ii$.$Oil company

iii.Gambling casino

Solution

Problem $13-27$

a$.$ Compute the expected value, standard deviation, and coefficient of variation before the acquisition.

D P DP

Recession $30\mathrm{.}00\mathrm{.}39\mathrm{.}030*0\mathrm{.}3$ Correct

Normal economy $50\mathrm{.}00\mathrm{.}420\mathrm{.}050\mathrm{.}0*0\mathrm{.}4$ Correct

Strong economy $70\mathrm{.}00\mathrm{.}321\mathrm{.}070*\mathrm{.}3$ Correct

$50\mathrm{.}0$ total Correct

Solution to Question $27$: Standard Deviation and Covecient of Variation

D P

Recession $3020900$ Wrong

Normal economy $500$ Correct

Strong economy $70$ Wrong

Wrong

Wrong

Coeeficient of Variation $($V$)$ Wrong

After the Acquisition

Expected Value $50$ Wrong

Standard Deviation $15$ Wrong

Coefficient of Variation $0\mathrm{.}250$ Wrong

b$.$ Comment on whether this acquisition appears desirable to you.

c$.$Do you think the firm$$s share price is likely to go up as a result of this acquisition?

d$.$ If the firm was interested in reducing its risk exposure, which of the following three industries would you advise it to consider for an acquisition? Briefly comment on your answer.