Aa Aa 2. Understanding business and financial risks The total risk in a firm is

Question

Aa Aa 2. 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: Blue Strawberry Manufacturing Company and Blue Mouse Production Inc. It is your job to evaluate the relative business and financial risks of Blue Strawberry and Blue Mouse. 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 utlines some of Blue Strawberry's and Blue Mouse's major attributes: Blue Strawberry Manufacturing Inc. Production Inc. Blue Mouse Total assets Total debt Expected NOPAT Standard deviation of expected NOPAT $1,012,000 $1,056,000 $294,800 $4,400,000$4,400,000 $1,980,000 $1,056,000 $189,200 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 Blue Mouse O Blue Strawberry O Blue Strawberry O Blue Mouse

Explanation / Answer

A. Business risk can be defined as a possibility that company is not able to achieve target profit or anticipated profit.. Thus company with higher standard deviation will have higher business risk. Blue strawberry will have higher business risk.

B. Company with higher debt have higher financial risk. Thus blue mouse have higher financial risk

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