Business

Business
Order Description
Question 3
a) Two firms, ABC and XYZ, both produce widgets. The price of widgets is $1 each. Firm
ABC has total fixed costs of $500,000 and variable costs of 50 cents per widget. Firm
XYZ has total fixed costs of $240,000 and variable costs of 75 cents per widget. The
corporate tax rate is 30%. If the economy is strong, each firm will sell 1,200,000
widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets.
i) Determine the after-tax profit of Firm ABC and Firm XYZ if the economy enters a
recession, and if the economy is strong.

ii) Calculate Firm ABC and Firm XYZ’s degree of operating leverage. (4 marks)
b) To what extent do you think the industry life cycle is relevant to security analysts? Your
response should discuss:
i) The way in which the industry life cycle can be used by security analysts, and
ii) The limitations of industry life cycle for security analysis.