You are given the information of firm A and B for their performance evaluation.
ID: 1175066 • Letter: Y
Question
You are given the information of firm A and B for their performance evaluation.
Firm A B
Sales 60 55
EAT 20 18
Total Assets 75 72
Stockholder’s Equity 40 40
Suppose the industry average of net profit margin ratio, total asset turnover and equity multiplier is around 30%, 0.78 times and 1.9 respectively.
Which firm appears to have problems?
11.You are given the information of firm A and B for their performance evaluation.
Firm A B
Sales 60 55
EAT 20 18
Total Assets 75 72
Stockholder’s Equity 40 40
Suppose the industry average of net profit margin ratio, total asset turnover and equity multiplier is around 30%, 0.78 times and 1.9 respectively.
Which firm appears to have problems?
Firm A has problems.Firm B has problems.
None of them presents problems.
Both of them presents problems.
Explanation / Answer
Net profit margin ratio of firm A = EAT/Sales
= 20/60
= 33.33%
Total assets turnover of firm A = Sales/Total assets
= 60/75
= 0.80 times
11.
Equity multiplier of firm A = Total assets/ Stockholders' equity
= 75/40
= 1.875
Net profit margin ratio of firm B = EAT/Sales
= 18/55
= 32.73%
Total assets turnover of firm B = Sales/Total assets
= 55/72
= 0.76 times
Equity multiplier of firm B = Total assets/ Stockholders' equity
= 72/40
= 1.8
Comparison of firm A , firm B and the industry
Net profit margin ratio, total assets turnover ratio and equity multiplier of firm A and firm B are more or less, close to the industry averages. Hence none of the firms presents problems.
Hence, correct option is (c)
12.
Firm B shall improve its total assets turnover ratio since it is lower than the industry average and thus indicates an inefficient utilisation of assets.
The above statement is true. Firm B's Total assets turover is 0.76 times, which is less than industry avergae of 0.78 times. Hence, there is a potential to improve total assets turnover ratio to make it at par with industry average.
Remaining two statements are false. Firm A's total assets turonver is above industry average, hence firm A is utilizing its assets more efficiently as compared to the industry.
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Firm A Firm B Industry Net profit margin ratio 33.33% 32.73% 30% Total assets turnover 0.80 times 0.76 times 0.78 times Equity multiplier 1.875 1.8 1.9Related Questions
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