foundation of risk

Good Student
Posts: 22
Joined: Sat Apr 26, 2014 7:29 am

foundation of risk

Postby sessiljoseph » Wed Apr 30, 2014 6:19 am

for the past 4 yrs companyA has been outperforming company B the corporategovernance model of company a is well respected among investors at present company A is trying to take over company B the probability that company A would be succesful in it is3and the company b stocks are expected to pay a dividenedof 1$which is expected to grow at 15% and return on working capital to be 30% after acqusition if accquistion is unsuccessful company B will be giving a return of-5% with a growth rateof-1%
what should the investor do consider the returns from 2 yrs and the present stock price of b is 2$
a. invest
do not invest
can not say
insufficient data

Finance Junkie
Posts: 709
Joined: Wed Apr 09, 2014 6:28 am

foundation of risk

Postby edupristine » Wed Apr 30, 2014 8:17 am

Going from decision making tree, there are two possibilities either the acquisition is successful or it is not. So there will be 4 nodes, Invest and there is successful acquisition, invest and there is no acquisition. Then the same follows for Do not invest decision.

Then one can calculate the NPV of both all the decisions to decide on whether to invest or not

Success -0.6 In the Best case scenario too it has negative NPV
Invest 0.3

Donot Invest 0.3
Year 1 Year 2
Return 0.1 0.115
Time value 0.7 0.8
npv = -0.6 (.7+.8-2)
Since the best case scenario comes out have a negative NPV, so do not invest

Return to “FRM Part I”


Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to and we will rectify it.