Understandingbusiness financial risks

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: Western Gas & Electric Corp. and Eastern Electric & Gas Inc. It is your job

to evaluate the relative business and financial risks of Western G&E and Eastern E&G$.$

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 Western G&E$\text{'}$s and Eastern E&G$\text{'}$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?

Eastern Electric & Gas Inc.

Western Gas & Electric Corp.

Which firm has more financial risk?

Western Gas & Electric Corp.

Eastern Electric & Gas Inc.