Question

In: Finance

Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum...

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 $ 35 .4
Normal economy 55 .2
Strong economy 75 .4

Compute the expected value, standard deviation, and coefficient of variation prior to the acquisition. (Do not round intermediate calculations. Enter your dollar answers in millions rounded to 2 decimal places (e.g., $12,300,000 should be entered as "12.30"). Round the coefficient of variation to 3 decimal places.)
  

Solutions

Expert Solution

Probability (P) RETURN (Y) (P * Y ) P * (Y -Average Return of Y)^2
RECESSION 40% 35 14.00 160.00
NORMAL ECONOMY 20% 55 11.00 0.00
STRONG ECONOMY 40% 75 30.00 160.00
TOTAL 55.00 320.00
Expected Return = (P * Y)
                                                                      55.00
VARIANCE = P * (Y -Average Return of Y)^2
320.00
Standard Deviation = Square root of (P * (Y -Average Return of Y)^2)
Square root of 320
17.89
COEFFICIENT OF VARIATION= STANDARD DEVIATION/ MEAN
17.89 / 55
0.325

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