Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum as part of its production process, is examining a plastics firm to add to its operations. Before the acquisition, the normal expected outcomes for the firm were as follows:

Outcomes

($ millions) Probability

Recession. $20 .30

Normal economy. 40 .40

Strong economy. 60 .30

After the acquisition, the expected outcomes for the firm would be:

  Outcomes

($ millions) Probability

Recession. $10 .3

Normal economy. 40 .4

Strong economy. 80 .3

a. Compute the expected value and the coefficient of variation (use a standard deviation of $15.5 million).

b. After the acquisition, the following are found:

Expected value 43.0 ($ millions)

Standard deviation 27.2 ($ millions)

Coefficient of variation .633

Comment on whether this acquisition appears desirable.

c. Do you think the firm’s stock price is likely to go up as a result of this acquisition?

d. If the firm was interested in reducing its risk exposure, which of the following three industries would you advise it to consider for an acquisition? Briefly comment on your answer.

(1) Chemical company

(2) Oil company

(3) Computer company