Hooper Chemical Company a major chemical firm that uses such

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 (S millions) Probability Normal economy Strong economy $20 40 60 0.30 0.40 0.30 After the acquisition, the expected outcomes for the firm would be Outcomes (S millions) Probability Normal economy.. Strong economy S 10 40 80 0.3 0.4 a. Compute the expected value, standard deviation, and coefficient of variation before the acquisition b. After the acquisition, these values are as follows Expected value Standard deviation Coefficient of variation 43.0 ( millions) 27.2 (3 millions) 0.633 Comment on whether this acquisition appears desirable to you C. Do you think the firm\'s stock price is likely to go up as a result of this acquisition? d. If the firm were interested in reducing its risk exposure, which of the following three industries would you advise it to consider for an acquisition? Brietly comment on your answer (1) Chemical company (2) Oil company (3) Computer company

Solution

a) Particulars Probability Outcomes Expected Return Outcomes- Total expected return Variance (Probability*Outcomes) Recession 0.3 20 6 -20 -20^2 *0.3 Normal Economy 0.4 40 16 0 0 Syrong Economy 0.3 60 18 20 20^2 *0.3 Total 40 240 Total expected return= 40 Variance= 240 Coefficient of variation= Standard deviation/expected return Coefficient of variation= Square root of variance/40 Coefficient of variation= Square root of 240/40 Coefficient of variation= 15.491/40=.39 b) The coefficient of variation has increased from .39 to .633 after acquisition. And the lower coefficient is considered as better because of better risk-return trade offs. c) The stock prices will not rise after acquisition beacuse the coefficient of variation has increased which is negative indicator for the investors. d) The company may consider acquiring Oil company to lower the risk as oil is used as raw material in chemical company.