Firm #1 is a technology company that develops, licenses, and supports a wide range of software products and services for various computing devices worldwide. Firm #2 provides IT products and services worldwide including strategic outsourcing, process, integrated technology, cloud, and maintenance services, as well as technology-based support services worldwide. In addition to this firm #2 provides consulting services and also develops software although the majority of revenue is generated by IT infrastructure including servers.

1) Which of the following is the most likely explanation for the higher ROE for firm #2?

a. Firm #2 has higher profit margin

b. Firm #2 has lower profit margin

c. Firm #2 has less debt

d. Firm #2 has more debt

2) Which of the following is true with respect to firm #1 relative to firm #2?

a. Firm #1 does a better job turning over assets

b. Firm #1 does a better job generating return on equity

c. Firm #1 uses more debt

d. Firm #1 does a better job of converting sales to net income

e. None of the above

#1 #2 Profit Margin (Net Income / Sales) 19.69% 14.86% Return on Equity (Net Income / Total Equity) 22.09% 80.35% R&D as % of sales 12.93% 6.09% Cost of Goods Sold (as % of sales) 42.52% 53.93% Total Asset Turnover (Sales/Total Assets) 0.64 0.88 Debt/Equity 74.98 280.23