Corporate Finance Company A and Company B’s revenues and variable expenses (e.g. COGS) are identical, butA’s fixed expenses (e.g. SG&A) are smaller than B’s (see table below). Assuming the size of theirrevenues are 100% correlated with the strength of the economy, would A’s equity Beta be smaller,the same, or larger than B’s equity beta? Explain why. Strength of economy: Weak Economy Strong EconomyCompany A B A BRevenues 150 150 180 180Variable Expenses 20 20 30 30Fixed Expenses 20 100 20 100EBT 110 30 130 50
Company A and Company B’s revenues and variable expenses (e.g. COGS) are identical, but
A’s fixed expenses (e.g. SG&A) are smaller than B’s (see table below). Assuming the size of their
revenues are 100% correlated with the strength of the economy, would A’s equity Beta be smaller,
the same, or larger than B’s equity beta? Explain why.
Strength of economy: Weak Economy Strong Economy
Company A B A B
Revenues 150 150 180 180
Variable Expenses 20 20 30 30
Fixed Expenses 20 100 20 100
EBT 110 30 130 50
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