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: Taylor Building Inc. and Stevens and Vincent Inc. It is your job to evaluate the relative business and financial risks of Taylor Building Inc. and Stevens and Vincent Inc. 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 Taylor Building Inc.'s and Stevens and Vincent Inc.'s characteristics: Use the given financial data to indicate which firm has the higher degree of each type of risk. Which firm has more business risk?

Explanation / Answer

Taylor Building is having more business risk because the deviation of Taylor Building is much more than the deviation from NOPAT of the Stevens and the Vincent Inc. Stevens and vincent Inc- More financial Risk The debt is much more in Stevence and Vincent Inc than the Taylors building so its financial risk is high

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