Question

General Meters is considering two mergers. The first is with Firm A in its own volatile...

General Meters is considering two mergers. The first is with Firm A in its own volatile industry, the auto speedometer industry, while the second is a merger with Firm B in an industry that moves in the opposite direction (and will tend to level out performance due to negative correlation). General Meters Merger with Firm A General Meters Merger with Firm B Possible Earnings ($ in millions) Probability Possible Earnings ($ in millions) Probability $ 10 .20 $ 10 .15 20 .20 20 .30 30 .60 30 .55 a. Compute the mean, standard deviation, and coefficient of variation for both investments. (Do not round intermediate calculations. Enter your answers in millions. Round "Coefficient of variation" to 3 decimal places and "Standard deviation" to 2 decimal places.) b. Assuming investors are risk-averse, which alternative can be expected to bring the higher valuation?

Homework Answers

Answer #1

Answer a.

Firm A:

Expected Return = 0.20 * 10 + 0.20 * 20 + 0.60 * 30
Expected Return = 24

Variance = 0.20 * (10 - 24)^2 + 0.20 * (20 - 24)^2 + 0.60 * (30 - 24)^2
Variance = 64

Standard Deviation = (64)^(1/2)
Standard Deviation = 8

Coefficient of Variation = Standard Deviation / Expected Return
Coefficient of Variation = 8 / 24
Coefficient of Variation = 0.333

Firm B:

Expected Return = 0.15 * 10 + 0.30 * 20 + 0.55 * 30
Expected Return = 24

Variance = 0.15 * (10 - 24)^2 + 0.30 * (20 - 24)^2 + 0.55 * (30 - 24)^2
Variance = 54

Standard Deviation = (54)^(1/2)
Standard Deviation = 7.35

Coefficient of Variation = Standard Deviation / Expected Return
Coefficient of Variation = 7.35 / 24
Coefficient of Variation = 0.306

Answer b.

Firm B has low risk than Firm A as coefficient of variation is lower. So, if investors are risk-averse then Merger B will bring the higher valuation.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Problem 20-12 Portfolio consideration and risk aversion [LO20-4] General Meters is considering two mergers. The first...
Problem 20-12 Portfolio consideration and risk aversion [LO20-4] General Meters is considering two mergers. The first is with Firm A in its own volatile industry, the auto speedometer industry, while the second is a merger with Firm B in an industry that moves in the opposite direction (and will tend to level out performance due to negative correlation). General Meters Merger with Firm A General Meters Merger with Firm B Possible Earnings ($ in millions) Probability Possible Earnings ($ in...
General Meter is considering two mergers. The first is with Firm A. in its own volate...
General Meter is considering two mergers. The first is with Firm A. in its own volate industry. the auto speedometer industry, while the second is a merger with Firm B in an industry that moves in the opposite direction (and will tend to level out performance due to negative correlation). General Meter Merger/Firm possible earnings in Mil. $45. 50 and 55. probability. 20. .20 and .60. General Meters Merger with Firm B. possible earning in Mil. $45, 50 and 55....
Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share...
Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporation will be $8 with or without the merger. However, the standard deviation of the earnings will go from $1.92 to $1.36 with the merger because the two firms are negatively correlated. a. Compute the coefficient of variation for the Knight Corporation before and after the merger. (Do not round intermediate calculations and round your answers to 2 decimal places.)   ...
Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum...
Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum as part of its production process, is examining a plastics firm to add to its operations. Before the acquisition, the normal expected outcomes for the firm were as follows:    Outcomes ($ millions) Probability Recession $ 20 0.1 Normal economy 40 0.5 Strong economy 70 0.4 Compute the expected value, standard deviation, and coefficient of variation prior to the acquisition. (Do not round intermediate...
Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum...
Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum as part of its production process, is examining a plastics firm to add to its operations. Before the acquisition, the normal expected outcomes for the firm were as follows:    Outcomes ($ millions) Probability Recession $ 20 .2 Normal economy 30 .2 Strong economy 50 .6 Compute the expected value, standard deviation, and coefficient of variation prior to the acquisition. (Do not round intermediate...
Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum...
Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum as part of its production process, is examining a plastics firm to add to its operations. Before the acquisition, the normal expected outcomes for the firm were as follows:    Outcomes ($ millions) Probability Recession $ 20 0.2 Normal economy 40 0.4 Strong economy 50 0.4 Compute the expected value, standard deviation, and coefficient of variation prior to the acquisition. (Do not round intermediate...
Digital Technology wishes to determine its coefficient of variation as a company over time. The firm...
Digital Technology wishes to determine its coefficient of variation as a company over time. The firm projects the following data (in millions of dollars): Year Profits: Expected Value Standard Deviation 1 $ 99 $ 39 3 146 63 6 221 112 9 250 158 a. Compute the coefficient of variation (V) for each time period. (Round your answers to 3 decimal places.) Year Coefficient of Variation 1 3 6 9 b. Does the risk (V) appear to be increasing over...
You are considering two mutual funds as an investment. The possible returns for the funds are...
You are considering two mutual funds as an investment. The possible returns for the funds are dependent on the state of the economy and are given in the accompanying table. State of the Economy Fund 1 Fund 2 Good 20 % 40 % Fair 10 % 20 % Poor −10 % −40 % You believe that the likelihood is 20% that the economy will be good, 50% that it will be fair, and 30% that it will be poor. a....
A general contracting firm experiences cost overruns on 12% of its contracts. In a company audit,...
A general contracting firm experiences cost overruns on 12% of its contracts. In a company audit, 20 contracts are sampled at random. a)What is the probability that exactly four of them experience cost overruns? b)What is the probability that fewer than three of them experience cost overruns? c)Find the mean number that experience cost overruns. Round the answer to one decimal place. d)Find the standard deviation of the number that experience cost overruns.
Seri Kitchen is a firm manufacturing kitchen cabinet. The company must choose between two asset purchases....
Seri Kitchen is a firm manufacturing kitchen cabinet. The company must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis. Asset A Asset B Rate of Return Probability Rate of Return Probability 10% 30% 5% 40% 15% 40% 15% 20% 20% 30% 25% 40% i. For each asset, compute the expected rate of return. ii. For each asset, compute the standard deviation of the expected return. iii. For each asset,...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT