Below Are Selected Ratios for Widget Corporation and Tools Inc

question 56

Essay

Below are selected ratios for Widget Corporation and Tools Inc. Use this information to answer the following questions. $\begin{array}{c}\begin{array}{ll}\\\text { 1. } & \text { Net operating asset turnover } \\\text { 2. } & \text { Inventory turnover } \\\text { 3. } & \text { Accounts receivable turnover } \\\text { 4. } & \text { Fixed assets turnover } \\\text { 5. } & \text { Net operating profit margin } \\\text { 6. } & \text { Assets-to-equity } \\\text { 7. } & \text { EBIT/revenues } \\\text { 8. } & \text { Gross margin } \\\text { 9. } & \text { Income tax rate }\end{array}\begin{array}{rr}\text { Widget Corp.}&\text { Tools, Inc. }\\2.0 & 2.0 \\4.6 & 4.0 \\12.0 & 12.0 \\1.8 & 2.0 \\4.5 \% & 2.9 \% \\2.10 & 3.3 \\9.9 \% & 8.6 \% \\21.1 \% & 19.8 \% \\35 \% & 35 \% \end{array}\end{array}$


a. Which company has a higher return on equity?
b. We know from the residual income method of valuation that, all other things equal, the company with the higher ROCE will have a higher intrinsic value. Why are all other things not likely to be equal in this instance (hint: look at components of ROCE)?
c. Which company has better operating performance (that is, ignoring capital structure).

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Definitions:

Second-degree Price Discrimination

A pricing strategy where prices vary based on the quantity consumed or purchased, rather than customer characteristics, allowing sellers to capture more consumer surplus.

Consumer Surplus

The difference between the highest price a consumer is willing to pay for a good or service and the actual price they pay.

Sherman Antitrust Act

A landmark federal statute in the United States passed in 1890 aimed at promoting economic competition by prohibiting monopolies, cartels, and other forms of anticompetitive practices.

Price Discrimination

A pricing strategy where a firm charges different prices for the same product or service to different customers, based on their willingness to pay.