Question

Two firms have sales of $1.2 million each. Other financial information is as follows:

Firm	A		B
EBIT	$	190,000	$	190,000
Interest expense		30,000		65,000
Income tax		45,000		35,000
Debt		1,720,000		220,000
Equity		580,000		600,000

What are the operating profit margins and the net profit margins for these two firms? Round your answers to two decimal places.

Operating profit margins:

Firm A: %

Firm B: %

Net profit margins:

Firm A: %

Firm B: %

What are their returns on assets and on equity? Round your answers to two decimal places.

Return on assets:

Firm A: %

Firm B: %

Return on equity:

Firm A: %

Firm B: %

Answer 1

Firm	A	B
Net income ( EBIT - Interest expense - Income tax )	115000	90000
Total assets ( Debt + Equity )	2300000	820000

Operating profit margin = EBIT / Sales
Firm A = 190000/1200000	15.83%
Firm B = 190000/1200000	15.83%
Net profit margin = Net income / Sales
Firm A = 115000 / 1200000	9.58%
Firm B = 90000 / 1200000	7.50%
Return on Asset = Net income / Total assets
Firm A = 115000/2300000	5.00%
Firm B = 90000/820000	10.98%
Return on equity = Net income / Equity
Firm A = 115000/580000	19.83%
Firm B = 90000/600000	15.00%