Question

Assume the following are true:

Company X has a profit margin lower than Company Y.

Company X and Company Y have the same amount of TOTAL LIABILITIES

Company X and Company Y have the same amount of TOTAL EQUITY

Is it possible for Company X’s ROE to be the same as Company Y’s ROE?

1. NO, it is not possible
2. Yes, if  Company X’s  TOTAL ASSET TURNOVER is higher than Company Y’s.
3. Yes, if Company X’s  TOTAL ASSET TURNOVER is the same as Company Y’s
4. Yes, if  Company X’s  TOTAL ASSET TURNOVER is lower than Company Y’s
5. Yes, if  Company X’s  ROA is higher than Company Y’s

Answer 1

Correct Answer IS B Yes, if  Company X’s  TOTAL ASSET TURNOVER is higher than Company Y’s.

	COMPANY X	COMPANY Y
TOTAL LIABILITIES	Same	Same
TOTAL EQUITY	Same	Same
Hence
TOTAL ASSET	Same	Same
Profit Margin	Lower	Higher
ROE	Same	Same

ROE is same only if PROFIT of both company is equal But profit margin of X is less , so to make profit equal X must have greater Sale So it is concluded that X must have TOTAL ASSET TURNOVER is higher than Company Y’s.