Chapter 12, Problem 7PROB

Summary Introduction

Expected EPS:

Estimated income to be earned from a company to its equity shareholders. EPS stands for earnings per share.

Calculate the expected EPS as follows:

$\text{Expected EPS}={\displaystyle \sum \left(\text{EPS}\times \text{Probability}\right)}$

Standard deviation is used to measure the risk of the investment.

Calculate the standard deviation as follows:

$\text{Standard deviation}=\sqrt{{\displaystyle \sum \left({\left(\text{EPS}-\text{Expected EPS}\right)}^2\times \text{Probability}\right)}}$

Coefficient of variation:

It is ratio of standard deviation to expected return.

Calculate the coefficient of variation as follows:

$\text{Coefficient of variation}=\frac{\text{Standard deviation}}{\text{Expected return}}$

CFO of II has total assets of $5 million. II has estimated EBIT of $1.2 million with a probability is 0.2, EBIT is $800,000 with a probability of 0.5, and EBIT is $500,000 with a probability of 0.3.