ATech has fixed costs of $7 million and profits of $4 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $4 million. But it operates with higher fixed costs of $8 million and lower variable costs.

Required:

What is the degree of operating leverage (DOL) for each company? (Defined here as 1 + Fixed costs/Profit.) (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. Which firm would you expect to have profits that are more sensitive to the state of the economy?

multiple choice 1

ATech

ZTech

b. Which firm would you expect to have the higher stock market beta?

multiple choice 2

ATech

ZTech