AINOS Company runs a perpetual encabulator machine, generating revenues averaging $40 million per year. Raw...
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AINOS Company runs a perpetual encabulator machine, generating revenues averaging $40 million per year. Raw material costs are 65% of revenues, so they are variable costs. There are no other operating costs. AINOS Company's cost of capital is 20%, and its long-term borrowing rate is 16%. Fidelity Financial proposes a fixed-price contract to supply raw materials at $26 million per year for 10 years
What happens to the operating leverage and business risk of the encabulator machine if AINOS Company agrees to the fixed-price contract?
Question 14 options:
If AINOS Company agrees to the fixed-price contract, the operating leverage decreases, and thus assets increases.
If AINOS Company agrees to the fixed-price contract, the operating leverage increases, and thus assets decreases.
If AINOS Company agrees to the fixed-price contract, the operating leverage increases, and thus assets increases.
If AINOS Company agrees to the fixed-price contract, the operating leverage decreases, and thus assets decreases.
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