Question

Attempts: Keep the Highest: /2 8. Problem 4.11 Click here to read the eBook: Profitability Ratios RATIO CALCULATIONS Assume the following relationships for the Caulder Corp.: Sales/Total assets 1.8x Return on assets (ROA) 6% Return on equity (ROE) 8% a. Calculate Caulder's profit margin assuming the firm uses only debt and common equity, so total assets equal total invested capital. Round 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 your answer to two decimal places.

Answer 1

Answer:-

a)

Caulder's profit margin

Given

Sales /Total assets = 1.8

Return on Assets (ROA) = 6% = (net income / sales ) x (sales / assets) = (net income / sales) x 1.8
Net income / sales = 6% / 1.8 = 3.33 %

Profit margin = net income / sales = 3.33%     

b)

Caulder's debt-to- capital ratio

Return on Equity (ROE) = 8% = (net income / sales) x (sales / assets) x (assets / equity)
8% = 3.33% x 1.8 x (assets / equity)
Total Assets / equity = 8% / ( 3.33% x 1.8) = 1.33
Total Capital / equity = 1.33 ( Given total assets is equal to total capital invested)
Total capital = debt + equity ( Given firm uses only debt and equity)

Therefore

(debt + equity) / equity = 1.33
debt + equity = 1.33 x equity
debt = 1.33 x equity
Debt / total capital = 1.33 x equity / (1.33 equity + equity) ( Total capital = debt + equity)
= 1.33 x equity / 2.33 x equity
= 1.33 / 2.33
Debt / total capital = 0.57 = 57 %