Company X and Company Y are in the same industry and have the following ratios
Discuss the relative natures of the two companies in terms of risk and return. Identify the more growth-oriented firm and justify your selection. Support your discussion and conclusions by referring to the ratios.
What will be an ideal response?
Answer: Company Y has more financial risk because its debt/equity ratio is higher than both X and the industry average. Y's current ratio is lower than both A's and the industry average, indicating less liquidity and possibly a willingness to sacrifice some safety in pursuit of efficiency. Company Y has a lower net profit margin which may be caused by higher interest expenses due to the higher debt load. Company Y offers a higher return to shareholders based on the return on equity ratio. Y's higher rate of return on equity is entirely due to its use of debt financing because return on assets is the same for both companies (1.9 × 4.2 = 2.1 × 3.8). Company X's net profit margin is slightly above the industry average, while both companies' return on equity ratios are below the industry averages. Company Y is probably growing faster than Company X because the dividend payout ratio is lower and the total asset turnover rate is higher.
You might also like to view...
For a market challenger, attacking ________ is a high risk but potentially high payoff strategy, which also allows it to distance itself from other challengers
A) a firm of its own size B) the market leader C) a regional firm D) an underfinanced firm E) a poorly performing firm
Which of the following errors would cause the Balance Sheet and Statement of Retained Earnings columns of a work sheet to be out of balance?
A. Entering an expense amount in the Balance Sheet and Statement of Retained Earnings Debit column. B. Entering a liability amount in the Balance Sheet and Statement of Retained Earnings Credit column. C. Entering a revenue amount in the Balance Sheet and Statement of Retained Earnings Debit column. D. Entering an asset amount in the Income Statement Debit column. E. Entering a liability amount in the Income Statement Credit column.
You should create a multimedia slide for all of the following reasons except to A) ?illustrate and simplify complex ideas
B) ?provide a transition from one major point to the next. C) ?demonstrate your use of technology. D) ?introduce or review your key points.
A company that is controlled by another corporation is called a parent company
Indicate whether the statement is true or false