Final answer:
The firm's sensitivity to the business cycle is influenced by Financial leverage, Operating leverage, and the Type of product it sells. The correct response is D. I, II, and III, as each of these factors significantly contributes to how earnings respond to cyclical changes.
Step-by-step explanation:
The sensitivity of a firm's earnings to the business cycle is affected by multiple factors, including Financial leverage, Operating leverage, and the Type of product that the firm sells. The correct answer to the question is D. I, II, and III. Here's how each factor influences the firm's sensitivity:
- Financial leverage refers to the use of borrowed funds to finance the firm's operations. Higher financial leverage means higher fixed financial obligations, which can amplify the effects of business cycles on earnings.
- Operating leverage denotes the proportion of fixed costs in a firm's cost structure. Firms with high operating leverage have higher break-even points and are more sensitive to changes in sales volume that occur during business cycles.
- The Type of product impacts sensitivity as well. Companies that sell non-cyclical, or essential, goods and services are less sensitive to the business cycle compared to firms that sell luxury or cyclical products, which people buy more of during economic booms and cut back on during recessions.
All three factors—Financial leverage, Operating leverage, and Type of product—are significant in determining how a firm's earnings are affected by the ups and downs of the business cycle.