MINDTAP Assignment 13-Capital Structure and Leverage Due Today at 1159 PM EST Aa
ID: 2804376 • Letter: M
Question
MINDTAP Assignment 13-Capital Structure and Leverage Due Today at 1159 PM EST Aa Aa 3. Understanding business and financial risks 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: Happy Turtle Manufacturing Company and Teal Camel Production Inc. It is your job to evaluate the relative business and financial risks of Happy Turtle and Teal Camel. 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 Teal Camel's major attributes: Happy Turtle Manufacturing Inc. Teal Camel Production Inc. Total assets $5,200,000 $5,200,000 Total debt Expected NOPAT Standard deviation of expected NOPAT 2,860,000 1,040,000 1,248,000 $1,248,000 301,600 $202,800Explanation / Answer
Question 1). Answer :- Team Camel Production Inc. has more business risk.
Explanation :- As the standard deviation of expected net operating profit after tax (NOPAT) of Team Camel Production Inc. is more than that of Happy Turtle Manufacturing Inc., accordingly, Team Camel Production Inc. has more business risk than the Happy Turtle Manufacturing Inc.,
Question 2). Answer :- Happy Turtle Manufacturing Inc., has more financial risk.
Explanation :- As the total debt of Happy Turtle Manufacturing Inc., is more than that of the Team Camel Production Inc., accordingly, Happy Turtle Manufacturing Inc., has more financial risk than the Team Camel Production Inc.
Conclusion :-
1). Team Camel Production Inc., has more business risk. 2). Happy Turtle Manufacturing Inc., has more financial risk.Related Questions
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