Data about two firms X&Y in the same period. Net Sales: X $118 Y $298 Total A: X $68 Y139 Total L: X $23 Y 38 ROE of both firms are 13%. Which firm has higher net profit margin and financial leverage?
Company X Equity = 68-23=45 ROE = 13% = NI/45 So NI = 5.85 NPM = 5.85/118=4.96% Financial Leverage = TA / Equity = 68/5.85 = 11.62 Company Y Equity=101 ROE=13% so NI=13.13 NPM=13.13/298=4.41 FL=10.59 So Ans Co. X
CP, thanks for your super clear steps.
“Financial Leverage = TA / Equity = 68/5.85 = 11.62” you used NI instead of equity, should be 68/45 = 1.5111 for X and 139/101 = 1.376238 for Y, but CPK (like usual) posting up solid explanations. how’s your L2 studying going?
yep, thanks for correcting the typo, bannisja