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3. Understanding business financial risks The total risk in a firm is determined by evaluating...

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Finance

3. Understanding business financial risks

The total risk in a firm is determined by evaluating the firms business risk and financial risk.

As an analyst, Olivia is comparing two nearly identical manufacturing firms: Extensive Enterprise Inc. and Little Business Corporation It is your job to evaluate the relative business and financial risks of Extensive and

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 Extensives and s characteristics:

Extensive

Total assets $4,400,000 $4,400,000
Total debt 2,420,000 880,000
Expected NOPAT 1,056,000 1,056,000
Standard deviation of expected NOPAT 171,600 255,200

Use the given financial data to indicate which firm has the higher degree of each type of risk.

Which firm has more business risk?

Extensive Enterprise Inc.

Little Business Corporation

Which firm has more financial risk?

Little Business Corporation

Extensive Enterprise Inc.

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