13-3 Risk analysis
Given the following information, calculate the expected value for Firm C's EPS. Data for Firms A and B are as follows: E(EPSA) = $5.10, and Standard Deviation of Firm A = $3.61; E(EPSB) = $4.20, and Standard Deviation of Firm B = $2.96.
0.1 0.2 0.4 0.2 0.1
Firm A: EPSA ($1.50) $1.80 $5.10 $8.40 $11.70
Firm B: EPSB (1.20) 1.50 4.20 6.90 9.60
Firm C: EPSC (2.40) 1.35 5.10 8.85 12.60
b. You are given that Standard Deviation of Firm C = $4.11. Discuss the relative riskiness of the three firms' earnings.
Breakeven analysis The Weaver Watch Company sells watches for $25; the fixed costs are $140,000; and variable costs are $15 per watch.
'a. What is the firm's gain or loss at sales of 8,000 watches? At 18,000 watches?
b. What is the breakeven point? Illustrate by means of a chart.
c. What would happen to the breakeven point if the selling price were raised to $31?
What is the significance of this analysis?
d. What would happen to the breakeven point if the selling price were raised to $31
but variable costs rose to $23 a unit?
The solution looks at a risk and breakeven analysis. With the standard deviation given, the relative riskiness of the three firms' earnings is given.