Question

1.5 Profit Margin and Debt Ratio Assume you are given the following relationships for the Haslam Corporation: Sales/total assets Return on assets (ROA) 2% Return on equity (ROE) 1. Calculate Haslam's profit margin. Do not round intermediate calculations. Round your answer to two decimal places. 5% % 2. Calculate Haslam's liabilities-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places. % 3. Suppose half of Haslam's 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

1.

Sales / TA = 1.5

Therefore, Sales = 1.5TA

Net income / TA = ROA

Net income / TA = 0.02

Therefore, Net income = 0.02TA

Profit margin = (Net income / Sales) × 100

                        = (0.02TA / 1.5TA) × 100

                        = 2 / 1.5

                        = 1.33 (Answer)

2.

Net income / TA = ROA

Net income / TA = 0.02

Therefore, Net income = 0.02TA ……. (a)

Net income / Equity = ROE

Net income / Equity = 0.05

Therefore, Net income = 0.05Equity …….. (b)

Equation (a) and (b) are equal because both are the function of net income.

0.02TA = 0.05Equity

Equity / TA = 0.02 / 0.05

                    = 0.40

Now we know that [TA = TL + Equity]

Since TA is 1 and equity is 0.40, liabilities (TL) would be as below:

TA = TL + Equity

1= TL + 0.40

TL = 1 – 0.40

      = 0.60

Liabilities to assets = 0.60 or 60%

Answer: 60

2.

Given, ½ is debt.

Therefore, debt to asset = Liabilities to asset × ½

                                       = 60% × ½

                                       = 30%

Answer: 30