The total risk in a firm is determined by evaluating the firm\'s business risk a

Question

The total risk in a firm is determined by evaluating the firm's business risk and financial risk. As an analyst, Olivia is comparing two nearly identical manufacturing firms: Mitata Co. and Shine Trophy Co. It is your job to evaluate the relative business and financial risks of Mitata Co. and Shine Trophy Co. The two firms have the same level of total assets and expected net operating profit after taxes (NOPAT), but they differ on two critical characteristics: total debt and the standard deviation of expected NOPAT. The following table outlines some of Mitata Co.'s and Shine Trophy Co.'s characteristics: Use the given financial data to indicate which firm has the higher degree of each type of risk. Which firm has more business risk? Which firm has more financial risk?

Explanation / Answer

Mitata Co. has Higher Business risk ( Because of higher standard deviation in NOPAT)

Mitata Co. has higher financial risk ( Because of higher leverage i.e, higher debt )

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