Question
In: Economics
The recent Great Recession of 2008-2009 has had significant impact on a wide range of corporate...
The recent Great Recession of 2008-2009 has had significant
impact on a wide range of corporate performance. What impact would
you predict it had on leverage? Would financial leverage have
increased, decreased, or remained the same? What about operating
leverage? Why? please elaborate and explain
Solutions
Expert Solution
The recent Great Recession of 2008-2009 has had significant impact on a wide range of corporate performance. What impact would you predict it had on leverage? Would financial leverage have increased, decreased, or remained the same? What about operating leverage? Why?
During the period of recessions, businesses generally does not tend to take out additional loans simply because of the higher interest rates. Financial leverage is usage of debt to acquire additional assets, however as businesses aren't taking more loans thus the financial leverage remains the same.
Operating leverage is a financial measure to know what percentage of total costs are inclusive of fixed costs and variable costs in an effort to compute how well a company uses its fixed costs to earn profits. Operating leverage stems from change in the EBIT to changes in sale; and during recession the EBIT and sales both declines thus the operating leverage remains the same.
Rahul Sunny answered 2 years agoRelated Solutions
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