Beta is a measure of riskiness of a firm. It measures the systematic risk. When risk is high, the beta will be high and according to capital asset pricing model (CAPM), the required return for investors would be high. The revenue cycle of a firm, along with operating and financial leverage are major determinants of beta of a company.
operatingleverage tells about the company's fixed and variable costs proportions in its total costs. When fixed costs are high, then operating leverage is also high. Companies with high degree of operating leverage can have huge fluctuations in profit when revenue changes.
a. incorrect. Low leverage firms are perceived to be less risky firms.
b. correct. When revenues are highly cyclical, the riskiness is high and beta of such companies are high. High level of fixed cost implies high operating leverage. Such companies have high beta. Thus, both factors lead to high beta and this is the answer.
c. incorrect. Low operating leverage causes its beta to be less than that of (b).
d. incorrect. Low cyclical business and low fixed cost would lead to low beta.
e. incorrect. Low cyclical business would cause beta to be lower than that of (b).
Thus, the correct option is b. Company Y should have highest beta.
Which of the following companies should have the highest beta? Multiple Choice Orange Company that has...
Companies will generally have a ____ beta if their: Multiple Choice high; sales are high compared to other firms in their industry. low; stock price is relatively low. high; sales are growing at a steady rate of increase. high; sales are highly dependent on the market cycle. low; production costs are primarily fixed in nature.
Based on the income statements of the three following retail businesses, which company has the highest operating leverage? Revenue Variable costs Contribution margin Fixed costs Net income Alpha Company $ 245,000 (131,000) $ 114,000 (80,000) $ 34,000 Beta Company $ 245,000 (191,000) S 54,000 (20,000) $ 34,000 Gamma Company $ 245,000 (161,000) $ 84,000 (50,000) $ 34,000 Multiple Choice Alpha Company Beta Company Gamma Company They all have same operating leverage
Which of the following visible colors of light has the highest frequency? blue orange O red yellow green
help these are multiple choice 20. When a firm employs no debt: a. It has a financial leverage of one b. It has financial leverage of zero C. Its operating leverage is equal to its financial leverage d. It will not be prifitable e. None of the above. 21. Under normal conditions, with 60% probability, financing Plan A produces a return $35,000 higher than Plan B; under tight money conditions, with 45% probability, Plan A produces a return of $40,000...
Based on the income statements shown below, which division has the cost structure with the highest operating leverage? Bottled Revenue Variable costs Contribution margin Fixed costs Soft Drinks $ 50,000 (10,000) 40,000 (30,000) $ 10,000 Water $50,000 (5,000) 45,000 (40,000) $ 5,000 Fruit Juices $ 50,000 (30,000) 20,000 (10,000) $ 10,000 Net income Multiple Choice Ο Bottled Water. Ο Soft Drinks. Ο The three divisions have identical operating leverage. Ο Fruit Juices.
Epitome Analysts Resources (EAR) has provided the following information about three companies: Company Degree of Operating Leverage (DOL). Degree of Financial Leverage (DFL). Acme 1.5% 6.0x Apex 3.0x 4.0x Alps 5.0x 2.0x Which company would be considered riskiest? Why? Alps is the riskiest because it has the highest DOL among the three firms. a. Acme is the riskiest because its DFL = 6.0, which is the highest leverage associated with any of the three firms. Apex is the riskiest because...
1. Which of the following BEST describes a company's proper liquidity management? Multiple Choice Liquitity management is a balancing act; managers try to find liquidity levels that are neither too high not too low. A Financial Manager will try to keep as much cash on the books as possible to maximize short-term earnings. A company should never keep cash in its account because bond coupon payments can be deferred for up to a year without penalty. Liquidity levels that are...
Which of the following statements regarding Company A is incorrect? Multiple Choice Which of the following statements regarding Company A is incorrect? If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its break-even point in units is 36,000 units. If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its variable expenses must be $20...
Which of the following statements is false? Multiple Choice In general, research & development costs should be expensed as incurred until the point in time that commercial production will start. When expenditures are made after a capital asset has been acquired and put into use, those costs should be capitalized if the asset useful life is extended Companies may opt to value their financial liabilities such as bonds payable at their current fair value on the balance sheet. None of...
True or False? Leverage is created when a company accumulates significant amounts of Cash. Companies have experienced significant increases in accounts receivable because of cash based sales in direct to consumer businesses. Long-term Marketable Securities are not as liquid as Short-term Marketable Securities and needs to be segregated. Including Cash and Cash Equivalents stockpiles in Current Assets distorts the value of current assets required to operate the business. When companies have significant interest-bearing Noncurrent Liabilities, these are viewed as a...