A recession is anticipated to lower GDP by 4.0%. Orange Inc. believes that its sales will drop 2.0% under these conditions. Orange currently has a Return on Assets of 8% and its annual Fixed Costs are 20% of its assets. Orange is completely financed by equity. (a) Discuss if Orange is a cyclical company. (b) Calculate the effect of the recession on Orange’s stock return. (c) How would your results be different if Orange were partly debt-financed?

A recession is anticipated to lower GDP by 4.0%. Orange Inc. believes that its sales will drop 2.0% under these conditions. Orange currently has a Return on Assets of 8% and its annual Fixed Costs are 20% of its assets. Orange is completely financed by equity. (a) Discuss if Orange is a cyclical company. (b) Calculate the effect of the recession on Orange’s stock return. (c) How would your results be different if Orange were partly debt-financed?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 10P

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