Question

4.11

Assume the following relationships for the Caulder Corp.:

Sales/Total assets	1.9×
Return on assets (ROA)	5.0%
Return on equity (ROE)	9.0%

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.

Profit margin:   %

Debt-to-capital ratio:   %

Answer 1

Given Return on assets (ROA) = 0.05

  Return on Equity (ROE) = 0.09

Profit margin = Net income / sales

Return on Assets (ROA) = Net income / total assets

Net income = Total assets * 0.05

So, total assets = Net income / 0.05

Sales = 1.9 * total assets

Sales = 1.9 *(Net income / 0.05)

Sales = 38 * Net income

Profit margin = Net income / sales

Profit margin = Net Income / (38 * Net income)

Profit margin = 0.0263 or 2.63%

Debt to capital ratio = Total Debt / (total debt + shareholder's equity)

Since given in question that total assets = Total invested capital, Where total invested capital equals debt + equity

Debt to capital ratio = Total debt / total assets

Total debt = Total assets - total equity

So, Debt to capital ratio = (Total assets - total equity) / total assets

Debt to capital ratio = (Total assets - net income/0.09) / total assets

given, Net income = total assets * 0.05

Debt to capital ratio = [total assets - (0.05*total assets / 0.09)] / total assets

Debt to capital ratio = (total assets - 0.5555 total assets ) / total assets

Debt to capital ratio = 0.4444 (or) 44.44%

So, profit margin = 2.63%

Debt to capital ratio = 44.44%