Question

3)  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 option B.

Yes, if Company X’s TOTAL ASSET TURNOVER is higher than Company Y’s.

The following are the formula for computing ROE:

ROE = Net profit margin * Total asset turnover * Equity multiplier

Here, the equity multiplier for the both company is same and the net profit margin for the company X is lower than company Y. It is possible for Company X’s ROE to be the same as Company Y’s ROE, if the Company X’s total asset turnover is higher than Company Y’s.