14-3 RISK ANALYSIS a.Given the following information, calculate the expected val
ID: 2760030 • Letter: 1
Question
14-3 RISK ANALYSIS
a.Given the following information, calculate the expected value for Firm C’s EPS. Data for Firms A and B are as follows: E(EPSA) = $5.10, and sA = $3.61; E(EPSB) = $4.20, and sB = $2.96.
Probability
0.1
0.2
0.4
0.2
0.1
Firm A: EPSA
($1.50)
$1.80
$5.10
$8.40
$11.70
Firm B: EPSB
(1.20)
1.50
4.20
6.90
9.60
Firm C: EPSC
(2.40)
1.35
5.10
8.85
12.60
b.You are given that sC = $4.11. Discuss the relative riskiness of the three firms’ earnings.
Probability
0.1
0.2
0.4
0.2
0.1
Firm A: EPSA
($1.50)
$1.80
$5.10
$8.40
$11.70
Firm B: EPSB
(1.20)
1.50
4.20
6.90
9.60
Firm C: EPSC
(2.40)
1.35
5.10
8.85
12.60
Explanation / Answer
Expected EPS = sum of probability x EPS
P
EPS
P x EPS
0.1
-2.4
-0.24
0.2
1.35
0.27
0.4
5.1
2.04
0.2
8.85
1.77
0.1
12.6
1.26
5.1
Therefore, expected EPS of C would be
sA = 3.61
sB = 2.96
sC= 4.11
Since standard deviation of EPS C is the highest, it is the most riskiest among all three firms.
Ranking as per riskiness high to low:
P
EPS
P x EPS
0.1
-2.4
-0.24
0.2
1.35
0.27
0.4
5.1
2.04
0.2
8.85
1.77
0.1
12.6
1.26
5.1
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