Answer an exercise question

Comparing Operating Characteristics Across Industries
Name
Institutional Affiliation
Question P2-50
Response
Firms have two primary sources to finance operations: equity and debt financing (Dyckman et al., 2018). Although the two facilities extend the same facilities to a from, they are different in treatment. For instance, equity financing requires issuing stocks which dilute the ownership while debt financing increases liabilities and additional costs in interests to be paid over the principal. The composition of debt in the two firms, Apple Inc. and HP., the analysis utilized the debt to equity metric.
The debt-equity ratio is a relative ratio between the total liabilities or debts that the entity has and shareholders’ equity. It is calculated using the following formula as outlined by Dyckman et al., (2018):
Debt-equity ratio=Total LiabilitiesShareholders’Equity
For the entities under consideration, the debt-equity ratio is computed as follows:
Firm Debt Equity Formula Debt-Equity ratio
Apple Inc. 120,292 111547 120292/111547 1.08
H.P. Inc. 76,475 26,731 76475/26731 2.86
Based on the above computations, both firms have more liabilities than the shareholder’s equity in the entities as both ratios are more than 1 in the ratios, e.g., Apple Inc. has 1.08 while H.P. has 2.86. However, comparing the two, H.P Inc. has a heavier debt than Apple Inc. relative to the shareholder’s equity. It is vital no note that in case of bankruptcy, the creditors have priority over the shareholders and thus a high debt-equity ratio shows the impossibility of a firm paying the shareholders if it collapses.

H.P. Inc. thus finances most of its assets and activities using debt than Apple Inc.
Returns on Assets (ROA)
The ROA is computed as follows:
ROA=Net IncomeTotal Assets*100Firm Net Income Assets Formula ROA
Apple Inc. 39,510 231,839 39510/231839 17.04%
H.P. Inc. 5,013 103,206 5013/103206 4.86%
From the calculations, Apple Inc. has a higher return on assets ratio due to the efficient use of the assets under its management.
Gross margin
The gross margin compares the gross profit to the net sales and shows the profitability of a firm in the costs of obtaining goods. It is calculated using the following formula:
Gross margin=Gross profitSales*100 It is computed as follows:
Firm Gross profit Sales Formula Gross margin
Apple Inc. 70,537 182,795 70537/182795 38.59%
H.P. Inc. 26,615 111,454 26615/111454 23.88%
The differences in the gross margin could be resulted by H.P Inc. obtaining its goods at a higher cost relative to the price it charges, the transportation costs of availing the goods to the firm, and the related sales charges being high.
Reference
Dyckman, T., Hanlon, M., Magee, R.P., Pfeiffer, G.M., Hartgraves, A.L, and Morse, W.J. (2018). Financial and Managerial accounting for decision makers. Retrieved from https://cambridgepub.com/ereader/4777/?preview#page/i