19 May, 15:42

# 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.

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1. 19 May, 17:13
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a) Profit Margin = 4.17%

b) Debt to Capital Ratio = 66.67%

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%