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 companies—a
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 | $ | 102 | $ | 8 | $ | 2.0 | ||||||
Gourmet restaurant | + | 0.6 | 65 | 5 | 1.1 | |||||||||
Baby food company | + | 0.2 | 55 | 3 | 1.8 | |||||||||
Nutritional products company | − | 0.5 | 78 | 4 | 3.4 | |||||||||
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
Gourmet restaurant
Baby food company
Nutritional products company
a-3. Which company is the most risky?
Baby food company
Nutritional products company
Treynor Pie Company
Gourmet restaurant
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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