Financial Reporting and Analysis Q208
0. Selected information for a company and the common size data for its industry are provided below:
| Company (£) | Common Size IndustryData (% of sales) | |
| EBIT | 100,000 | 22.0 |
| Pretax profit | 85,500 | 18.2 |
| Net Income | 74,200 | 13.5 |
| Sales | 350,000 | 100 |
| Total assets | 650,000 | 150 |
| Total equity | 400,000 | 65.5 |
| ROE | 18.6% | 20.6% |
The company’s inferior ROE compared to that of the industry is most likely
due to its:
due to its:
- Option :
- Explanation : As shown below, the company’s financial leverage is lower that the industry’s leverage. The low ROE of the company is most likely because it has low financial leverage.
Company Industry Tax burden ratio 74.2/85.5 = 0.87 13.5/18.2 = 0.74 Financial leverage 650/400 = 1.625 150/65.5 = 2.29 Interest burden ratio 85.5/100 = 0.855 18.2/22 = 0.83
