Question 1 Risk and return

You are a financial consultant and you are seized with deciding on the risk associated with the two companies Copper Ltd and Gold Ltd operating in the same industry. Extracts from their latest financial statements are presented below: Income Statement for 2021 Copper Ltd Gold Ltd N$000 N$000 Sales 3 520 3 520 Variable costs 1 936 2 200 Fixed operating costs 764 380 Net income before interest 820 940 Interest 260 220 Net income before tax 560 720 Taxation 280 360 Net income 280 360 Capital structure at the end of 2021 Copper Ltd Gold Ltd N$000 N$000 Ordinary shareholders interest 1 400 1 800 Long term debt 2 600 2 200 Total 4000 4000

Required: Discuss the relative risk of the two companies, comparing their business risk, financial risk, and combined risk. Support your discussion with a calculation of the following measures:

a) Degree of operating leverage b) Degree of financial leverage c) Degree of combined leverage (Hint: You should appropriately discuss the risk indicated above and compare it with each other.)