If Two Firms Have the Same Net Profit Margin and the Same

question 69

Essay

If two firms have the same net profit margin and the same asset turnover ratio (i.e., the
same ROA), which one should have the higher ROE--the one that uses more or less
debt? Explain.

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Definitions:

Cost Functions

A mathematical relationship expressing the cost of production as a function of the quantity of goods produced.

Brand Name

A name owned by a particular firm that distinguishes its products from those of other firms.

Economic Profit

The net gain of a company after deducting both its explicit and implicit expenditures from its aggregate revenue.

Monopolistic Competitor

a firm that operates in a market with many competitors, each offering a product that is similar but not identical.