Two firms have sales of $1 million each. Other financial information is as follo

Question

Two firms have sales of $1 million each. Other financial information is as follows:

Firm                                            A                                           B

EBIT                                     $150,000                                $150,000

Interest Expense                  20,000                                     75,000

Income Tax                           50,000                                    30,000

Debt                                      400,000                                 700,000

Equity                                    600,000                                 300,000

What are the operating profit margins and the net profit margins for these two firms? What are their returns on assets and on equity? Why are they different?

Please explain and show work, TY:-)

Explanation / Answer

Operating profit margin (EBIT/Sales) and net profit margin (Net Profit/Sales) requires to be compared with sales.
Return on Equity:
Firm A ($150,000-20,000-50,000)/$300,000=26.67%
Firm B ($150,000-75,000-30,000)/$100,000=45%

The difference is due to smaller capital base and different tax rates 38% for A and 40% for B.

If the total assets are the same, say $500,000, it would suggest that Firm A has a liability of $200,000 and B has $400,000

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