Question

Profit Margin and Debt Ratio Assume you are given the following relationships for the Haslam Corporation: Sales/total assets Return on assets (ROA) Return on equity (ROE) 1.2 3% 5% Calculate Haslam's profit margin and liabilities-to-assets ratio. Do not round intermediate calculations. Round your answers to two decimal places. Profit margin: Liabilities-to-assets ratio: % Suppose half of its liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

A)Return on asset = Profit margin * Sales /total asset

      3 = Profit margin * 1.2

     Profit margin = 3/1.2

                    = 2.5%

B)Return on equity =Return on asset *Equity multipier

              5 = 3 *Equity multiplier

    Equity multiplier = 5 /3

                        = 1.66667

Now,

Let the equity be 1 .

Equity multiplier = Total asset/ total equity

1.66667 = Total asset /1

Total asset = 1*1.66667 = 1.66667

Liabilities =Total asset -total equity

           = 1.66667 -1

           = .66667

Liabilities to asset ratio = liabilities /total asset

                 = .66667 /1.66667

                  = .40 or 40%

C)

Debt = .66667* 1/2 = .333335

Debt to asset ratio = .333335 /1.66667

           = .20 or 20%