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28 August, 20:24

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. 28 August, 22:07
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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%
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