- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 11. Financial Analysis Techniques
- Subject 5. Profitability Ratios
CFA Practice Question
You are given the following information about a firm:
Cost of Goods Sold = $600
Operating Expenses = $200
Interest Expenses = $50
Tax Rate = 34%
Net Sales = $1,000
Cost of Goods Sold = $600
Operating Expenses = $200
Interest Expenses = $50
Tax Rate = 34%
What are the gross and operating profit margins?
Correct Answer: gross operating margin: 40%; operating profit margin: 20%
Operating profit margin = ($1000 net sales - $600 COGS - $200 operating expenses)/$1000 net sales = $200/$1000 = 0.2
Gross profit margin = ($1000 net sales - $600 COGS)/$1000 net sales = 400/1000 = 0.4
Operating profit margin = ($1000 net sales - $600 COGS - $200 operating expenses)/$1000 net sales = $200/$1000 = 0.2
User Contributed Comments 7
| User | Comment |
|---|---|
| kalps | Operating profit is before Interest and Tax (BEWARE THIS IS different to the cash flow statement where interest is included as part of an operating flow !!!!) |
| morpheus918 | Thanks for the heads up. That's the type of difference that could be hard to remember. |
| haarlemmer | operating profit=EBIT (interest&tax) |
| bobert | Had it asked for Net Profit margin it would have been 13.2% right? (Net Sales - COGS - Op Exp )*(1-tax rate) = 132/Net Sales |
| MattyBo | I believe Net Profit margin would also include a deduction for interest expenses. (Net sales - COGS - Op Exp - Interest Exp - Taxes) = 99 / Net Sales = 9.9% |
| moneyguy | I calculated net profit margin as shown by Matty. OPERATING profit margin, not NET profit margin. At test speed, it may be easy to make mistakes like this. |
| johntan1979 | Operating profit = EBIT i.e. BEFORE interest and taxes Will never go wrong if this is grounded in your head. |