CFA Practice Question

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CFA Practice Question

You are given the following information about a firm:

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%

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.
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