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# Risk Analysis and the Value of Information

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Sue Reynolds has to decide if she should get information (at cost of \$300,000) to invest in retail store. if she gets the information, there is a 0.45 probability that the information will be favorable and a 0.55 probability that the information will not be favorable.If the information is favorable, there is a 0.9 probability that the store will be a success.If the information is not favorable the probability of a successful store is only 0.2 without any information,sue estimates that the probability of a successful store will be 0.6 A successful store will give a return of \$120,000. if the store is built but is not successful,Sue will see a loss of \$90,000. of course, she could always decide not to build the retail store.

1) construct a decision tree.
2) what do you recommend?

#### Solution Preview

Hi,
I've put the decision tree and recommendations in the attached excel file. I've also written my recommendations below as they can be tough to read in excel. If you have any concerns or comments please don't hesitate to contact me. I've used arrows to ...

#### Solution Summary

Use a decision tree to determine whether or not to buy information before investing in a business opportunity.

\$2.19

## Intro to Financial Analysis

Part1

Compare the GAAP and economic balance sheets.

Dell, Inc. www.dell.com

Using the GAAP balance sheet, for each item, determine where it should be classified in the economic balance sheet (i.e., core operations, nonoperating net assets, debt claims, other capital claims, or equity claims). Create a two-column table in Word to show the corresponding accounts.

Determine whether any other items should appear on the economic balance sheet that is not on the GAAP balance sheet.

Determine if information exists in the annual report or elsewhere that can assist in valuing the non-operating net assets, debt, and other capital claims.
Part 2

Estimate the cost of equity, WACC, and unlevered cost of equity.

Use the same company (Dell).

Find the beta for your company use: http://finance.yahoo.com/q/ks?s=AIG
Estimate your company's cost of equity.
Estimate your company's weighted-average cost of capital.
Estimate your company's unlevered cost of equity.
Show your calculations in an Excel document. Be sure to label each calculation clearly.

Part 3

Combined income and cash flow statement

Download the company's annual report from its website, or the company's Form 10-K from the U.S. Securities and Exchange Commission (SEC) website [www.sec.gov].

Confirm that the firm's income, dividends, and other capital transactions explain the change in equity for the most recent year. (You may need to consult the statement of shareholders' equity.)
Confirm that the firm's cash flow statement begins with the same net income amounts found in the income statement.
Confirm that the firm's cash flow statement shows a change in cash that is equal to the difference between cash shown on the balance sheet at the beginning and end of the year. In Excel, construct a combined income statement and cash flow statement.
Write 1-2 paragraphs that answers the following: what would you do if you found there was a huge difference in the net income amounts and the reported cash flow amounts? How could technology limit the likelihood of this happening again?
Trend analysis

Finally, prepare a trend analysis of operating ratios for at least three years' worth of financial data. Prepare the analysis in Excel. You may wish to create a common-sized income statement first, but it isn't required.

If you adjusted for any nonrecurring items in step (1), explain the adjustments in a separate Word document. Use any other information in your company's annual report to explain the change in revenues, gross margin percentage, and operating margin percentage. Add this information to a Word document.

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