Homework%20Solutions%20-%20Week%206 - WEEK SIX HOMEWORK...

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W EEK S IX H OMEWORK S OLUTIONS The problems below represent the textbook version of the assignment and may differ slightly from the Quizzes version. However, these are more inclusive of the topics and solving them as presented here will give you the information needed to enter the solutions in the Quizzes . Problem 13-24 Treynor Pie Co. 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 $100 $8 $2.0 Gourmet restaurant . ........... + .6 60 6 1.2 Baby food company . ......... + .2 50 4 1.8 Nutritional products company . ........................... .7 70 5 3.4 a. Using the last two columns, compute the coefficient of variation for each of the four companies. Which company is the least risky? Which company is the most risky? b. Discuss which of the acquisition candidates is most likely to reduce Treynor Pie Company’s risk? Explain why. The Solution Part a The least risky company is the one with the lowest coefficient of variation. In this case, the gourmet restaurant chain is the least risky with a coefficient of variation of 0.20.
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This note was uploaded on 09/26/2011 for the course FINC 350-A taught by Professor Mason during the Fall '09 term at Columbia College.

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Homework%20Solutions%20-%20Week%206 - WEEK SIX HOMEWORK...

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