As a new loan officer in the Springfield Bank, you are comparing the financial riskiness of...

 

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As a new loan officer in the Springfield Bank, you are comparing the financial riskiness of two firms. Using the selected information from pro forma statements for each firm attached, complete the following tasks: 1. Calculate the expected values of Equity Eddie's and Barry Borrower's net incomes. 2. Calculate the standard deviations of Equity Eddie's and Barry Borrower's netincomes. 3. Calculate the coefficients of variation of Equity Eddie's and Barry Borrower's netincomes. 4. Compare Equity Eddie's and Barry Borrower's degrees of financial risk, which firm do you prefer? 5. If you have 30 percent of your total investment in Equity Eddie's, with the expected income of your calculation from (1) and a standard deviation of your calculation from (2), and the remainder 70 percent in Barry Borrower's, with the expected income of your calculation from (1) and a standard deviation of your calculation from (2). The correlation coefficient is 0.6. Determine the expected income and standard deviation for this portfolio. Equity Eddie's Company Net Income Forecast (in 000's) Probability of Occurrence 10% 5% 10% 70% 5% Operating Income $100 $200 $400 S600 $700 Interest Expense Before-Tax Income S100 $200 $400 S600 $700 Taxes (28%) Net Income S112 $288 $28 $56 $168 $196 $72 $144 $432 $504 Barry Borrower's Company Net Income Forecast (in 000's) Probability of Oecurrence 70% 5% 10% 10% 5% Operating Income Interest Expense Before-Tax 110 220 440 660 770 40 40 40 40 40 Income 70 180 400 620 730 Taxes (28%) 20 50 112 174 204 Net Income 50 130 288 446 526 As a new loan officer in the Springfield Bank, you are comparing the financial riskiness of two firms. Using the selected information from pro forma statements for each firm attached, complete the following tasks: 1. Calculate the expected values of Equity Eddie's and Barry Borrower's net incomes. 2. Calculate the standard deviations of Equity Eddie's and Barry Borrower's netincomes. 3. Calculate the coefficients of variation of Equity Eddie's and Barry Borrower's netincomes. 4. Compare Equity Eddie's and Barry Borrower's degrees of financial risk, which firm do you prefer? 5. If you have 30 percent of your total investment in Equity Eddie's, with the expected income of your calculation from (1) and a standard deviation of your calculation from (2), and the remainder 70 percent in Barry Borrower's, with the expected income of your calculation from (1) and a standard deviation of your calculation from (2). The correlation coefficient is 0.6. Determine the expected income and standard deviation for this portfolio. Equity Eddie's Company Net Income Forecast (in 000's) Probability of Occurrence 10% 5% 10% 70% 5% Operating Income $100 $200 $400 S600 $700 Interest Expense Before-Tax Income S100 $200 $400 S600 $700 Taxes (28%) Net Income S112 $288 $28 $56 $168 $196 $72 $144 $432 $504 Barry Borrower's Company Net Income Forecast (in 000's) Probability of Oecurrence 70% 5% 10% 10% 5% Operating Income Interest Expense Before-Tax 110 220 440 660 770 40 40 40 40 40 Income 70 180 400 620 730 Taxes (28%) 20 50 112 174 204 Net Income 50 130 288 446 526

Answer rating: 100% (QA)

4 Equity Eddie company should be pre... View the full answer