Widget Co and Tools Inc -Widget Has a Higher EBIT/Revenue but Lower Net Operating Profit

question 58

Multiple Choice

Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data:
$\begin{array}{lll}&\text { Widget Co. }&\text { Tools Inc. }\\\text { Net operating assets/common equity } & 1.37 & 1.53 \\\text { Net operating profit margin } & 19 \% & 21 \% \\\text { Income tax rate } & 47 \% & 28 \% \\\text { Revenues/net operating assets } & 0.81 & 0.61 \\\text { EBIT/revenues } & 38 \% & 32 \%\end{array}$
-Widget has a higher EBIT/Revenue but lower net operating profit margin than Tool. Which of the following statements could explain this better as a percentage of sales?

• A)Widget has greater interest expense and taxes.
• B)Widget has greater interest expense but lower taxes.
• C)Widget has lower interest expense but higher taxes.
• D)Widget has lower interest expense and taxes.

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Definitions:

Tax Rate Structure

The percentage of a tax base that must be paid in taxes—25 percent of income, for example.

Tax Base

The tax base is the total amount of income, property, assets, or other wealth that is subject to taxation by a taxing authority.

Marginal Tax Rate

The rate at which the next dollar of taxable income is taxed, indicating the impact of each additional dollar of income on taxes owed.

Additional Income

Extra earnings obtained beyond the regular sources of income or revenue.