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?

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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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?

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