Suppose You Are Analyzing Two Firms in the Same Industry

question 6

True/False

Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's debt ratio is 70% versus one of 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin.

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Definitions:

Stock Dividend

is a dividend payment made in the form of additional shares rather than cash, potentially diluting the value of each share but not the total value.

Owners

Individuals or entities that possess legal rights and control over a company, property, or asset.

New Shares

Securities that represent ownership in a corporation, issued to the public for the first time.

Stock Splits

A corporate action that increases the number of a company's shares by dividing each share, which typically decreases the share price but does not change the overall market capitalization.