CFA Level I · CFA Level I Exam · Analyzing Income Statements
Firm A and Firm B have the same revenue of $500 million. Firm A has gross profit of $200 million, operating expenses of $120 million, interest expense of $20 million and a tax rate of 25%. Firm B has a net profit margin of 10%. Compared with Firm B, Firm A's net income is most likely:
Firm A's net income is $5 million lower than Firm B's. A earns 200 - 120 - 20 = $60 million before tax, pays 25% tax of $15 million, and nets $45 million. Firm B earns 10% of $500 million, or $50 million.
- A$5 million higher.Correct
- B$5 million lower.
- Cequal to Firm B's.
Explanation
Firm A pre-tax profit = 200 - 120 - 20 = 60. Tax at 25% = 15, so net income = 45. Firm B net income = 10% x 500 = 50. Firm A is therefore $5 million lower, not higher. Choosing higher would result from ignoring tax or misreading the comparison.
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