Freddie's Company Has Mostly Fixed Costs and Valerie's Company Has

question 32

Essay

Freddie's company has mostly fixed costs and Valerie's company has mostly variable costs. Which company has the greatest risk of a net loss? Explain why

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Definitions:

Component Cost

The expense associated with acquiring or manufacturing each individual part of a product or service.

Flotation Cost

The total costs associated with issuing new securities, including underwriting fees and other expenses.

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, typically with dividends that are paid out before those of common stocks.

CAPM

The Capital Asset Pricing Model, a theory that describes the relationship between systematic risk and expected return for assets, particularly stocks.