FINA 3320: Corporate Finance Project 3: Risk and Return Equity Eddie’s Company N
ID: 2657817 • Letter: F
Question
FINA 3320: Corporate Finance
Project 3: Risk and Return
Equity Eddie’s Company Net Income Forecast (in 000’s)
Probability of Occurrence
5%
10%
70%
10%
5%
Operating Income
$100
$200
$400
$600
$700
Interest Expense
0
0
0
0
0
Before-Tax Income
$100
$200
$400
$600
$700
Taxes (28%)
$28
$56
$112
$168
$196
Net Income
$72
$144
$288
$432
$504
Barry Borrower’s Company Net Income Forecast (in 000’s)
Probability of Occurrence
5%
10%
70%
10%
5%
Operating Income
110
220
440
660
770
Interest Expense
40
40
40
40
40
Before-Tax Income
70
180
400
620
730
Taxes (28%)
20
50
112
174
204
Net Income
50
130
288
446
526
Please show how you got the answer
1.Calculate the expected values of Equity Eddie’s and Barry Borrower’s net incomes.
2. Calculate the standard deviations of Equity Eddie’s and Barry Borrower’s netincomes.
3. Calculate the coefficients of variation of Equity Eddie’s and Barry Borrower’s netincomes.
4. Compare Equity Eddie’s and Barry Borrower’s degrees of financial risk, which firm do you prefer?
Probability of Occurrence
5%
10%
70%
10%
5%
Operating Income
$100
$200
$400
$600
$700
Interest Expense
0
0
0
0
0
Before-Tax Income
$100
$200
$400
$600
$700
Taxes (28%)
$28
$56
$112
$168
$196
Net Income
$72
$144
$288
$432
$504
Explanation / Answer
1.
2.
standard deviation =square root of 8812.8 = 93.88
standard deviation =square root of 10657.2 = 103.23
3. coefficients of variation= standard deviation/expected value
So coefficients of variation of Equity Eddie’s = 93.88/288 = 0.32597
& coefficients of variation of Barry Borrower’s=
103.23/288 = 0.35845
4. Since coefficients of variation of Barry Borrower’s is greator than coefficients of variation of Equity Eddie’s so Barry Borrower is more risky therefore i will prefer Equity Eddie’s.
Equity Eddie’s Company('000) Net Income Proabaility Expected value 72 0.05 3.6 144 0.1 14.4 288 0.7 201.6 432 0.1 43.2 504 0.05 25.2 Total 288Related Questions
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