Risk and Return /Relative Valuations/ Enterprise Valuations / Free Cash Flow

You are a wealth management analyst, and your first job is to make investment recommendations to a client.

After extensive research, you have narrowed down to the following two companies: XiG, pronounced as "eleven groceries", is a grocery store chain operated in the U.S, with major competitor such as convenience store Seven-Eleven. XiG has very stable consumer base and its business is not very sensitive to the business cycle of the general economy.

TanW, acronym for Tan-my- way, is a beauty salon chain with a focus on tanning services. Its business is quite affected by the business cycle since people tend not to splurge on expensive non-necessities such as tanning spas.

Your client's current portfolio has an expected return of 6% per year. Based on some economic models, you are confident to simplify the analysis as follows: Suppose there are five possible states of the economy each with equal probability. Here is a table of the returns (unit: %) corresponding to each state. This table facilitates your recommendation decisions:

Please see Risk Table

States of XiG TanW Current XiG+C TanW+C Economy 6 9 8 2 3 2 2 3 3 6 7 IIIII 4 4 3 3 5 5 1 Expected Return VolatilityStates of Economy XiG TanW Current 6 2 9 8 3 3 2 2 3 4 6 7 4 5 3 3 5