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 | $ | 197 | $ | 9 | $ | 4.0 | ||||||
| Gourmet restaurant | + | 0.6 | 64 | 4 | 1.3 | |||||||||
| Baby food company | + | 0.3 | 54 | 2 | 1.8 | |||||||||
| Nutritional products company | 0.7 | 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?
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Treynor Pie Company
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Baby food company
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Gourmet restaurant
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Nutritional products company
a-3. Which company is the most risky?
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Gourmet restaurant
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Treynor Pie Company
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Baby food company
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Nutritional products company
b. Which of the acquisition candidates is most likely to reduce Treynor Pie Company's risk?
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Nutritional products company
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Baby food company
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Gourmet restaurant
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Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
15th edition
77861612, 1259194078, 978-0077861612, 978-1259194078
