If the business cycle were 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.
A) Firm A
B) Firm B
C) Indifferent between the two
D) It depends on how much financial leverage each firm has.

Question

Quizplus · Accepted Answer

During the upswing of the business cycle, there is usually an increase in economic activity, leading to an increase in demand for goods and services. Firms with high combined leverage tend to have higher fixed costs and thus are better positioned to benefit from the increase in revenue. This results in higher earnings, which translates to higher EPS.

If the Business Cycle Were Just Beginning Its Upswing, Which