Q1) A company is seeking to diversify its business and lower its risks. It already decided on purchasing Firm A and wishes to invest in an additional firm. Three firms are currently under consideration: B, C, and D. Each of these companies can be bought at the same multiple of earnings. The following table shows information about all the companies: Firm A B C D Correlation with A +1.0 +0.4 +0.3 -0.7 I Sales $126m $ 63m $ 52m $ 77m Expected Earnings $10.0m $9.0m $ 5.0m $7.0m Standard Deviation in Earnings $4.0m $1.4m $1.6m $3.2m a. Find the coefficient of variation (CV) for each of the four companies. Which company has the lowest risk? Which company has the highest risk?
Q1) A company is seeking to diversify its business and lower its risks. It already decided on purchasing Firm A and wishes to invest in an additional firm. Three firms are currently under consideration: B, C, and D. Each of these companies can be bought at the same multiple of earnings. The following table shows information about all the companies: Firm A B C D Correlation with A +1.0 +0.4 +0.3 -0.7 I Sales $126m $ 63m $ 52m $ 77m Expected Earnings $10.0m $9.0m $ 5.0m $7.0m Standard Deviation in Earnings $4.0m $1.4m $1.6m $3.2m a. Find the coefficient of variation (CV) for each of the four companies. Which company has the lowest risk? Which company has the highest risk?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
7
Transcribed Image Text:Q1) A company is seeking to diversify its business and lower its risks. It already decided
on purchasing Firm A and wishes to invest in an additional firm. Three firms are
currently under consideration: B, C, and D. Each of these companies can be bought
at the same multiple of earnings. The following table shows information about all the
companies:
Firm
A
BC
C
D
Correlation
with A
+1.0
+0.4
+0.3
-0.7
Sales
$126m
$ 63m
$ 52m
$ 77m
Expected
Earnings
$10.0m
$9.0m
$5.0m
$7.0m
Standard Deviation
in Earnings
$4.0m
$1.4m
$1.6m
$3.2m
a. Find the coefficient of variation (CV) for each of the four companies. Which company
has the lowest risk? Which company has the highest risk?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education