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: Red Hamster Manufacturing Company and Golden Fish Production Inc. It is your job to evaluate the relative business and financial risks of Red Hamster and Golden Fish. 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 Red Hamster's and Golden Fish's major attributes: Total assets Total debt Expected NOPAT Standard deviation of expected NOPAT Red Hamster Golden Fish Manufacturing Inc. Production Inc. $5,200,000 $5,200,000 $2,860,000 $1,040,000 $1,248,000 $1,248,000 $202,800 $301,600 Use the given financial data to indicate which firm has the higher degree of each type of risk. Which firm has more financial risk? Which firm has more business risk? O Golden Fish O Red Hamster Golden Fish O Red Hamster

Explanation / Answer

The firm with higher dent has higher financial risk

So, Red Hamster has higher financial risk

The firm with higher standard deviation of NOPAT has higher business risk

So, Golden Fish has higher business risk

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