Question

RATIO CALCULATIONS

Assume the following relationships for the Caulder Corp.:

Sales/Total assets	1.5x
Return on assets (ROA)	4%
Return on equity (ROE)	9%

1. Calculate Caulder's profit margin assuming the firm uses only debt and common equity, so total assets equal total invested capital. Round your answer to two decimal places.
   
   %
   
2. Calculate Caulder's debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital. Round your answer to two decimal places.
   
   %

Answer 1

Sales/Total assets=1.5

Sales=1.5*Total assets

ROA=Net income/Total assets

Net income=0.04*Total assets

ROE=Net income/Equity

Net income=0.09*Equity

Total assets=Total liabilities+Total equity

Debt=(Net income/0.04)-(Net income/0.09)

=13.8888889*Net income

Profit margin=Net income/Sales

=(0.04*Total assets)/(1.5*Total assets)

=2.67%(Approx)

Debt to capital ratio=Total debt/Total capital

=(13.8888889*Net income)/(Net income/0.04)

=55.56%(Approx)