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: Scorecard Corp. and Beatnik Designs Co. It is your job to evaluate the relative business and financial risks of Scorecard Corp. and Beatnik Designs Co. 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 Scorecard Corp.'s and Beatnik Designs Co.'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? Which firm has more financial risk? Scorecard Corp. Scorecard Corp. Beatnik Designs Co. Beatnik Designs Co.

Explanation / Answer

Higher Business risk

Beatnik designs ( Because of higher standard deviation in NOPAT)

Higher financial risk

Scorecard Corp( Because of higher leverage i.e, higher debt )

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