Question

Question) One of the determinants of beta, the cyclicality of revenues, refers to...

Multiple choice answers) Please answer and Explain!

a) the correlation of a firm's revenue with the capital structure.

b) the correlation of the firm's revenue with the business cycle.

c) the cycle of revenues during an initial public offering.

d) the volatility in a firms revenue during a given period.

Answer 1

b. the Correlation of the Firms revenues with the business cycles

The cyclicality of the revenues defines the relation or the influence of the business cycles to the sales revenues of the company

· Hence cyclical companies which depend largely the business cycles have much more dependence on this factor .

· The correlation coefficient determines the nature of this cylices ,

· If the correlation coefficient p= positive , then revenues are directly proportional with the business cycle

· If the correlation coefficient p= 0 , then revenues are indifferent with the business cycle

· If the correlation coefficient p= negative , then revenues are inversely proportional with the business cycle

·

· Defensive industries like Consumer products and medicines , do not have any influence on cyclicity as their demand remains constant through the year as these are essential for the daily needs .

Hence the Beta determinant of the cyclicality of the revenues is the Correlation of the Firms revenues with the business cycles