Question
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
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 PieCompany | + | 1.0 | $ | 197 | $ | 9 | $ | 4.0 | ||||||
| Gourmet restaurant | + | .6 | 64 | 4 | 1.3 | |||||||||
| Baby food company | + | .3 | 54 | 2 | 1.8 | |||||||||
| Nutritionalproducts company | .7 | 75 | 3 | 3.2 | ||||||||||
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.)
a-2. Which company is the least risky?
| Nutritional products company | |
| Treynor Pie Company | |
| Baby food company | |
| Gourmet restaurant |
a-3. Which company is the most risky?
| Baby food company | |
| Treynor Pie Company | |
| Nutritional products company | |
| Gourmet restaurant |
b. Which of the acquisition candidates is most likely to reduce Treynor Pie Company's risk?
| Nutritional products company | |
| Gourmet restaurant | |
| Baby food company |
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Own Your Money
Authors: Michela Allocca
1st Edition
0760381127, 978-0760381120
