Suppose You Are Analyzing Two Firms in the Same Industry

question 5

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 total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is 70% versus 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:

Marginal Cost

The outlay involved in generating one more unit of a product.

Buyer's Willingness

The maximum amount a consumer is ready to pay for a good or service, reflecting the value they place on it.

Output Level

The quantity of goods or services produced by a firm or economy at a given time.

Price Discriminate

The practice of selling the same product to different customers at different prices, based on what each customer is willing to pay.