Question

Sales/Total assets 1.2× Return on assets (ROA) 5.0% Return on equity (ROE) 15.0% Calculate Caulder's profit margin and debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital. Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

a) Profit Margin= 4.17%

b) Debt to Capital Ratio= 66.67%

Step-by-step explanation:

The question is divided into two parts: the first is to calculate the profit margin and then the second is to calculate the debt to capital ratio

Given information:

Sales to Total Asset (Asset turnover) = 1.2x (meaning sales covers total assets 1.2 times)

Return on Assets (ROA) (Net income/Total Assets) = 5%

Return on Equity (ROE) (Net Income/Equity) = 15%

a) calculate the profit margin

The formula for profit margin according to the question

= Return on Assets (ROA) / Asset Turnover

= (Net income/Total Assets) ÷ Sales/Total Assets

= 5% (0.05)/ 1.2

=0.0416667= 4.17%

b)Debt to Capital Ratio

= Debt/ Total Invested Capital

According to the Question the following is assumed

Asset= Debt + Equity

Debt= Asset - Equity

To calculate Equity is to find the percentage of Total Assets that is from Equity as follows:

ROA/ROE = 0.05/0.15= 0.333333

This means 0.3333 of Total asset accounts for equity.

Debt= Asset - Equity

Debt= 1- 0.3333

Debt to capital is therefore= 0.666667 or 66.67%