Weston Tractor is a cyclical business that is forced to lay off workers during downturns. The CEO estimates that they saved $50 million during the last recession by laying off excess labor.

However, the company had additional expenses of $70 million three years later when it had to retrain the new workers. The firm is currently facing a similar situation. The risk-free rate is 10 percent, but Weston’s current borrowing rate is 16 percent. Should Weston lay off the workers?

If Weston was less highly leveraged, it would be able to borrow at 11 percent. How would this affect the firm’s decision? Discuss how a prospective employee would react on learning that Weston was substantially increasing its leverage.

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