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# Risk & Breakeven Analysis

13-3 Risk analysis
a.
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.
PROBABILITY
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?

#### Solution Summary

The solution looks at a risk and breakeven analysis. With the standard deviation given, the relative riskiness of the three firms' earnings is given.

\$2.19