Problem 9-13 Two firms have sales of $0.9 million each. Other financial information is as follows: Firm A B EBIT $ 190,000 $ 190,000 Interest expense 30,000 85,000 Income tax 65,000 10,000 Debt 1,340,000 850,000 Equity 560,000 730,000 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: %
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Problem 9-13
Two firms have sales of $0.9 million each. Other financial information is as follows:
| Firm | A | B | ||
| EBIT | $ | 190,000 | $ | 190,000 |
| Interest expense | 30,000 | 85,000 | ||
| Income tax | 65,000 | 10,000 | ||
| Debt | 1,340,000 | 850,000 | ||
| Equity | 560,000 | 730,000 |
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: %
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