Problem 13-22 Portfolio effect of a merger [LO13-5]

Treynor Pie Company is a food company specializing in high-calorie snack foods. It is seeking to diversify its food business and lower its risks. It is examining three companiesa gourmet restaurant chain, a baby food company, and a nutritional products firm. Each of these companies can be bought at the same multiple of earnings. The following represents information about all the companies.

Company	Correlation with Treynor Pie Company			Sales ($ millions)			Expected Earnings ($ millions)			Standard Deviation in Earnings ($ millions)
Treynor Pie Company	+	1.0		$	189		$	8		$	4.0
Gourmet restaurant	+	0.5			66			6			1.4
Baby food company	+	0.2			54			3			1.6
Nutritional products company		0.9			75			5			3.5

a-1. Compute the coefficient of variation for each of the four companies. (Enter your answers in millions (e.g., $100,000 should be entered as ".10"). Round your answers to 3 decimal places.)

	Coefficient of Variation
Treynor Pie Company
Gourmet restaurant
Baby food company
Nutritional products company

a-2. Which company is the least risky?

• Gourmet restaurant

• Baby food company

• Treynor Pie Company

• Nutritional products company

a-3. Which company is the most risky?

• Nutritional products company

• Treynor Pie Company

• Gourmet restaurant

• Baby food company

b. Which of the acquisition candidates is most likely to reduce Treynor Pie Company's risk?

• Baby food company

• Gourmet restaurant

• Nutritional products company