Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen. State of the economy Return on company A(%) Return on company B (%) Worse than expected 7.3% -4.7% Expected 11.5% 5.4% Better than expected 16.6% 24.3% Calculate the expected rate of return, and standard deviation of each company. [Note: you are supposed to show every step of your calculation and interpret the result.
Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen. State of the economy Return on company A(%) Return on company B (%) Worse than expected 7.3% -4.7% Expected 11.5% 5.4% Better than expected 16.6% 24.3% Calculate the expected rate of return, and standard deviation of each company. [Note: you are supposed to show every step of your calculation and interpret the result.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter1: An Overview Of Financial Management And The Financial Environment
Section: Chapter Questions
Problem 4Q
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Question
Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent
|
State of the economy |
Return on company A(%) |
Return on company B (%) |
|
Worse than expected |
7.3% |
-4.7% |
|
Expected |
11.5% |
5.4% |
|
Better than expected |
16.6% |
24.3% |
- Calculate the expected
rate of return , and standard deviation of each company. [Note: you are supposed to show every step of your calculation and interpret the result.
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