Question

Two firms have sales of $1.3 million each. Other financial information is as follows:

Firm	A		B
EBIT	$	230,000	$	230,000
Interest expense		30,000		75,000
Income tax		60,000		35,000
Debt		70,000		3,000,000
Equity		930,000		1,000,000

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

A)- Operating profit margins = EBIT/Sales

Operating profit margins for Firm A = $230,000/$1300,000

Operating profit margins for Firm A = 17.69%

Operating profit margins for Firm B = $230,000/$1300,000

Operating profit margins for Firm B = 17.69%

B)

Net Income = (EBIT - Interest Expenses - Tax rate)

Net Income for Firm A = ($230,000 - $30,000 - $60,000 = $140,000

Net Income for Firm B = ($230,000 - $75,000 - $35,000 = $120,000

Net profit margins = Net Income /Sales

Net profit margins for Firm A = $140,000/$1300,000

Net profit margins for Firm A = 10.77%

Net profit margins for Firm B = $120,000/$1300,000

Net profit margins for Firm B = 9.23%

C). Total Assets = Debt + Equity

Total Assets for Firm A = $70,000 + $930,000 = $1000,000

Total Assets for Firm B = $3,000,000 + $1,000,000 = $4000,000

- Return on Assets = Net Income/Total Assets

Return on Assets for Firm A = $140,000/$930,000

Return on Assets for Firm A = 15.05%

Return on Assets for Firm B = $120,000/$4000,000

Return on Assets for Firm B = 3%

d). Return on Equity = Net Income/Total Equity

Return on Equity for Firm A = $140,000/$1000,000

Return on Equity for Firm A = 14%

Return on Equity for Firm B = $120,000/$1000,000

Return on Equity for Firm B = 12%

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