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 |
| $ | 189 |
| $ | 8 |
| $ | 2.0 |
|
| Gourmet restaurant | + | .4 |
|
| 63 |
|
| 7 |
|
| 1.4 |
|
| Baby food company | + | .3 |
|
| 57 |
|
| 4 |
|
| 1.6 |
|
| Nutritionalproducts company | .5 |
|
| 76 |
|
| 5 |
|
| 3.3 |
| |
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?
|
| Treynor Pie Company |
|
| Baby food company |
|
| Gourmet restaurant |
|
| Nutritional products company |
a-3. Which company is the most risky?
|
| Gourmet restaurant |
|
| Nutritional products company |
|
| Baby food company |
|
| Treynor Pie Company |
b. Which of the acquisition candidates is most likely to reduce Treynor Pie Company's risk?
|
| Nutritional products company |
|
| Baby food company |
|
| Gourmet restaurant |
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