Question

An investor is comparing the first and second firms in an industry. The investor knows that usually the industry leader usually has the _______ while the second firm in the industry has the ________.

		higher net profit margin; higher debt ratio
		higher net profit margin; lower debt ratio
		lower net profit margin; higher debt ratio
		lower net profit margin; lower debt ratio

Answer 1

Usually the industry leader is measured on the basis of market capitalization. It is not necessary that the industry leader should have the highest margin. Because to capture the market the company has to adopt penetration pricing strategy. Obvisouly, in order to capture the market (which is the yardstick to measure whether a company is leader or not) the company always concentrates on selling high volume. So usually the market leader would have a lower profit margin with highest market share.

Also in case of debt ratio, ideal ratio is said to be 2:1. When the debt in a company increases, though it has leverage benefits, the company may have to suffer in times of turbulence as debt is a fixed cost in the capital structure of a company. Hence company usually limit the use of debt. So the second leader in the industry would usually have lower debt ratio

Hence option D would be correct i.e leader has lower net margin and second firm has lower debt ratio