Question

Click here to read the eBook: Profitability Ratios RATIO CALCULATIONS Assume the following relationships for the Caulder Corp.: Sales/Total assets 4% Return on assets (ROA) Return on equity (ROE) 9% a. Calculate Caulder's profit margin assuming the firm uses only debt and common equity, so total assets equal total invested capital. Round your answer to two decimal places. b. Calculate Caulder's debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital. Round your answer to two decimal places

Answer 1

Given,

Sales/Total Assets = 1.6 x

ROA= Net Income/ Total Assets = 4%

ROE = Net Income/equity = 9%

Now, Profit margin = Net Income/ Sales

= (Net Income/ Total Assets) * (Total Assets/ Sales)

= ROA / (Sales/Total Assets)

= 4%/1.6

= 2.50%

Now, ROE = Net Income / Equity Capital

9%  = Net Income/ Sales * Sales / Equity Capital

9% = Net Income/Sales * Sales /Total Assets * Total Assets/Equity capital

9% = Profit Margin * 1. 6 * Total Capital/Equity Capital (since Total Assets= total capital)

  9%= 2.5% *1.6 * Total Capital/ Equity Capital

So, Total Capital/Equity Capital = 9%/4% = 2.25

So equity capital = 1/2.25 * total capital =0.4444 * total capital

Therefore, Debt Capital = 0.5555 * total capital (As equity capital + Debt capital = Total Capital)

Therefore Debt Capital/Total Capital = 0.5555 = 5/9 = 55.56%