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 Pie Company | + | 1.0 | $ | 178 | $ | 9 | $ | 3.0 | ||||||
| Gourmet restaurant | + | .5 | 63 | 9 | 1.2 | |||||||||
| Baby food company | + | .4 | 51 | 5 | 1.8 | |||||||||
| Nutritional products company | .8 | 74 | 6 | 3.1 | ||||||||||
| | ||||||||||||||
| 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? | ||||||||
|
| a-3. | Which company is the most risky? | ||||||||
|
| b. | Which of the acquisition candidates is most likely to reduce Treynor Pie Company's risk? | ||||||
|
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Raising Venture Capital
Authors: Rupert Pearce, Simon Barnes
1st Edition
0470027576, 978-0470027578
