Treynor Pie Company is a food company specializing in high-calorie snack foods.
ID: 2567403 • Letter: T
Question
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 Standard Deviation in Earnings $ millions) $4.0 1.3 1.9 3.2 Correlation with Expected Sales Treynor Pie Companymillions) ($millions) Earnings $10 6 Company Treynor PieCompany Gourmet restaurant Baby food company Nutritionalproducts company $173 64 50 79 7 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.) Coefficient of Variation Treynor Pie Compan Gourmet restaurant Baby food company Nutritional products company a-2. Which company is the least risky? Baby food company Gourmet restaurant Treynor Pie Company Nutritional products company a-3. Which company is the most risky? Baby food company Gourmet restaurant Treynor Pie Company Nutritional products company b. Which of the acquisition candidates is most likely to reduce Treynor Pie Company's risk? Gourmet restaurant Baby food company Nutritional products companyExplanation / Answer
a-1.Computation of coefficient of variation:
coefficient of variation = standard deviation / expected earnings.
a-2.Which company is least risky?
Gourmet restaurant is least risky, since we have a lower coefficient of variation.
a-3. Which company is most risky?
Nutritional products are most risky, since we have a higher coefficient of variation.
b.Nutritional products company is most likely to,reducd Treynor pie company's risk, because negative correlation will help in smoothing the business fluctuations, a reduction in growth of one industry will be accompanied by a simultaneous increase in growth of another industry.
Coefficient of variation Treynor pie company ($4.0 million / $10 million) 0.40 Gourmet restaurant (1.3/8) 0.163 Baby food company (1.9 / 6) 0.317 Nutritional products (3.2/7) 0.457Related Questions
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