apital structure and Leverage raded Assignment | Read Chapter 13 | Back to Assig
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apital structure and Leverage raded Assignment | Read Chapter 13 | Back to Assignment Due Sunday 07,29.18 at 11:45 PM Attempts: 2. Understanding business and financial risks The total risk in a firm is determined by evaluating the firm's business risk and financial risk. Keep the Highest: 12 As an analyst, Olivia is comparing two nearly identical manufacturing firms: Happy Turtle Manufacturing Company and Yellow Dinosaur Production Inc. It is your job to evaluate the relative business and financial risks of Happy Turtle and Yellow Dinosaur The two firms have the same level of total assets and expected net operating profit after taxes (NOPAT), but they differ in two critical characteristics: total debt and the standard deviation of the expected NOPAT. The following table outlines some of Happy Turtle's and Yellow Dinosaur's major attributes: Happy Turtlie Yellow Dinosaur Total assets Total debt Expected NOPAT Standard deviation of expected NOPAT Manufacturing Inc. Production Inc. $5,200,000 $1,040,000 $1,248,000 $1,248,000 $223,600 $5,200,000 $2,600,000 $348,400 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? O Yellow Dinosaur O Happy Turtle O Yellow Dinosaur O Happy Turtle DELLExplanation / Answer
Financial risk: Happy turtle
A company with a relatively higher level of debt financing carries a higher level of financial risk. Therefore Happy turtle with $2600000 debt has more financial risk comparing with Yellow dinosaur which has $1040000 of debt.
Business risk
Business risk referee to the fundamental question that the company will be able to generate sufficient revenue in order to meet operation expenses and make a profit
Since standard deviation of expected NOPAT is higher for Happy turtle they have more business risk.
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