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    Business and Financial Risk of Assets

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    Understanding Business and Financial Risk
    The two firms have the same level of total assets and expected net operating profit after tax (NOPAT)
    But they differ on two critical characteristics: Total Debt and standard deviation of expected NOPAT. The information below outlines some of the Company A and Company B characteristics.
    Company A: Company B
    Total Assets $5,200.00 $5,200.00
    Total Debt $1,196,000 $2,340.00
    Expected NOPAT $1,248.00 $1,248.00
    Standard Deviation of expected NOPAT $348, 00 $223,600
    Which Company has more Business Risk?
    Which Firm has more financial Risk?
    2. Project will require 400,000 in assets
    . The Project is expected to produce an EBIT of 50,000.
    . The project will be financed with 100% equity
    . There will be 25,000 shares of common equity outstanding
    . The company faces a tax rate of 30%
    3.What will the ROE for this project? A. 8.31% B. 7.44%, C. 8.75% D. 7.00%
    4.What will the EPS will be if finances the project with 100% equity? $1.12,1.47,1.33,1.19,1.40
    5.Same Project is being financed with 50% debt and 50% equity. The interest rate on the debt will be 13%. Only 50% of project is financed with equity, it will only have 12,500 shares outstanding. What will be the ROE on this project if the company decides to finance with 50% debt and 50% equity?
    a. 8.40%
    b. 8.82%
    c. 9.66%
    d. 10.08%

    6. What is the EPS? $1.61, 1.47, 1.07,1.27,1.347. Using this financial leverage will _______________projects ROE
    a. Increase
    b. decrease

    © BrainMass Inc. brainmass.com October 10, 2019, 4:21 am ad1c9bdddf
    https://brainmass.com/economics/risk-analysis/busines-financial-risk-assets-456872

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    Answer:
    Given that,
    Company A Company B
    Total Assets $5,200.00 $5,200.00
    Total Debt $1,196.00 $2,340.00
    Expected NOPAT $1,248.00 $1,248.00
    Standard Deviation of expected NOPAT $348.00 $223.60

    Therefore,
    Business Risk for Company A=$348.00/$1,248.00=0.28
    Business Risk for Company ...

    Solution Summary

    The business and financial risks of assets are examined.

    $2.19