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Reading 59: Introduction to Industry and Company Analysis-LOS

Session 14: Equity Analysis and Valuation
Reading 59: Introduction to Industry and Company Analysis

LOS c: Explain the factors that affect the sensitivity of a company to the business cycle and the uses and limitations of industry and company descriptors such as "growth," "defensive," and "cyclical."

 

 

A firm’s earnings are most likely to be cyclical if:

A)
the firm produces luxury items.
B)
most of the firm’s costs depend on its level of output.
C)
the firm operates in a growth industry.


 

Producers of luxury items tend to have cyclical earnings because consumers typically decrease their purchases of these items during economic recessions. The earnings of firms with high percentages of variable costs are not as likely to be cyclical as those of firms with high percentages of fixed costs (i.e., high operating leverage). A growth industry has demand that is strong enough that earnings remain relatively unaffected by the business cycle.

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