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.

The question is incomplete. The complete question is given as follows:

Assume the following relationships for the Caulder Corp.:

Sales/Total assets = 1.3

Return on assets (ROA) = 4.0 %

Return on equity (ROE) = 8.0%

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.

Answer:

Profit margin = 3.08%

Debt ratio = 50%

Explanation:

Lets consider the meaning of the following terminologies:

Return on Assets: Return on Equity Assets turnover Equity ratio Debt ratio

Profit margin: This ratio relates profit to the sales revenue. It is the percentage of the sales revenue that is made as profit.

It is calculated as;

Profit margin = (profit/Sales) * 100 or i

Profit margin = Return on assets / assets turnover ii

Asset Turnover: Asset turnover measures the number of times a one dollar worth of asset is used to generate sales. It gives an idea of how efficient a business is using its assets to generate sales. The higher the better.

Asset turnover = Sales revenue/assets.

It is given in the question as 1.3 times

Return on Assets (R. O. A); The is the proportion (in %) of the total assets that is made as profit. That is, how much profit is made for every one Dollar invested in assets. It can be calculated as:

R. O. A = (Profit/Assets) * 100

Note, Assets = equity capital + debt capital.

It is also given in this question as 4.0%

So now we can calculate our profit margin using the second formula under profit margin;

Profit margin = R. O. A / Asset turnover

= 4.0/1.3

= 3.08 %

Lets continue;

Return on Equity (R. O. E). Equity capital is the capital provided by the ordinary shareholders. So the ROE measures, in percentage, the amount made as profit for every one Dollar of equity capital invested. That is, how much return is earned (in %) on every dollar of equity capital invested.

It is calculated as follows:

ROE = (Profit/equity capital) * 100

It is given in the question as 8.0%

Equity ratio: The is the proportion of the total assets that is financed by equity capital.

Equity ratio = equity capital / (equity capital + debt capital) i

= ROA / ROE ii

Debt ratio: Debt represents capital provided by external financiers in terms of loans and advances. So debt ratio is the proportion of the total assets that is financed by debt capital.

It is determined as;

Debt ratio = debt capital / (equity capital + debt capital) or

Debt ratio = 1 - equity ratio

So lets apply all of these to the question;

Debt ratio = 1 - equity ratio

Remember that equity ratio = ROA / ROE (using the second formula under equity ratio)

so equity ratio = 4/8 = 0.5

Finally,

Debt ratio = 1 - 0.5

= 0.5 * 100

= 50%