Question

3. Problem 13.03 Problem 13-3 Risk analysis are as follows: E(EPSA) $5.10, and a = $3.62; E(EPSB) a. Glven dle calculate the expected value for Firm C's EPS. Data for Firms A and $4.20, and as $2.98. Round your decimal places. 0,2 ty 0.2 0.1 0.1 ($1.63) $1.80 $5.10 $8.40 $11.83 (1.20 (2.57) 1.35 5.10 Firm A: EPS Firm B: EPSa Firm C: EPSc 1.39 4.20 7.01 9.60 12.77 8.85 b. You are given that oc $4.11. Discuss the relative riskiness f the three firms' eanings using their respective coefficients of variation. Round your answer to two decimal places. CV A C The most risky isSelect-

Answer 1

Expected EPS of firm C = sum of [probability * EPSc]

= 0.1 * (- $2.57) + 0.2 * $1.35 + 0.4 * $5.1 + 0.2 *$8.85 + 0.1 * $12.77

= $5.10

Therefore expected EPS of firm C is $5.10

Let’s calculate the coefficient of variation for each stock which is a simple measure of risk/reward ratio

Coefficient of variation = standard deviation/ expected EPS

Stock	Expected EPS (EPS)	Standard deviation (σ)	Coefficient of variation (CV)
A	$5.10	$3.62	=3.62/5.10 = 0.7098
B	$4.20	$2.98	= 2.98 /4.20 =0.7095
C	$5.10	$4.11	= 4.11 /5.10 = 0.8059

Stock C is most risky because its coefficient of variation is highest among all.