If the business cycle is just beginning its upswing, which firm would you anticipate would be likely to show the best growth in eps over the next year? Firm a has high combined leverage and firm b has low combined leverage.
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Answer:
Given: Business Cycle is beginning its uptrend or upswing.
Furthermore, Firm A has a high combined leverage and Firm B has a low combined leverage
Explanation:
Combined Leverage = Operating Leverage * Financial Leverage
Combined Leverage = % Change in EPS/ % Change in Sales
Now, Since Firm A has a higher combined leverage and the industry is likely to witness an upswing, therefore for the same percentage in sales for both firm A and firm B, Firm A will witness a higher percentage change in its Earning Per Share (EPS).
Therefore, Firm A is likely to show better EPS over the next year.
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