Question

Two firms have sales of $0.7 million each. Other financial information is as follows:

FirmAB

EBIT$150,000$150,000

Interest expense10,00080,000

Income tax55,00010,000

Debt410,0001,700,000

Equity530,000300,000

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

For FIRM A :

Sales : $7,000,00

EBIT : $1,50,000

INTEREST : $10,000

TAX : $55,000

NET INCOME : $4,85,000

FOR FIRM B :

SALES : $7,000,00

EBIT : $1,50,000

INTEREST : $80,000

TAX : $10,000

NET INCOME : $4,60,000

OPERATING MARGIN FOR A :

EBIT / SALES  

=$1,50,000/ $7,000,00

=21.43 % (rounded off to two decimal places)

FOR FIRM B:

= $1,50,000/ 7,000,00

=21.43%

FOR FIRM A :

NET PROFIT MARGIN = NET INCOME/ SALES

= $4,85,000/ 7,000,00

=69.29%

FOR FIRM B :

= $4,60,000/ 7,000,00

=65.71%

RETURN ON ASSETS FOR FIRM A :

NET INCOME/ TOTAL ASSETS

TOTAL ASSETS = DEBT + EQUITY

= $9,40,000

= 4,85,000/9,40,000

= 51.6 % ( ROUNDED OFF TO TWO DECIMAL PLACES)

FOR FIRM B :

= $4,60,000/2,000,000

=23 %

RETURN ON EQUITY FOR FIRM A :

= NET INCOME/ EQUITY

= $4,85,000/ 5,30,000

=91.51%

RETURN ON EQUITY FOR FIRM B:

= 4,60,000/3,00,000

=153.33%