Widget Co and Tools Inc -Widget Has a Higher EBIT/Revenue but Lower Net Operating Profit

Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data:
$\begin{array}{lll}&\text { Widget Co. }&\text { Tools Inc. }\\\text { Net operating assets/common equity } & 1.37 & 1.53 \\\text { Net operating profit margin } & 19 \% & 21 \% \\\text { Income tax rate } & 47 \% & 28 \% \\\text { Revenues/net operating assets } & 0.81 & 0.61 \\\text { EBIT/revenues } & 38 \% & 32 \%\end{array}$
-Widget has a higher EBIT/Revenue but lower net operating profit margin than Tool. Which of the following statements could explain this better as a percentage of sales?

A) Widget has greater interest expense and taxes.
B) Widget has greater interest expense but lower taxes.
C) Widget has lower interest expense but higher taxes.
D) Widget has lower interest expense and taxes.

Correct Answer:

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