Question

RATIO CALCULATIONS

Assume the following relationships for the Caulder Corp.:

Sales/Total assets	2.1x
Return on assets (ROA)	6%
Return on equity (ROE)	8%

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.

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 = 2.1x

Return on equity = Net Income / Total equity = 8%

Profit Margin = Net Income / Sales

Return on Assets = Net Income / Total Assets = 6%

Using equation: Sales / Total Assets = 2.1 ---> Sales = Total Assets * 2.1

Therefore calculating Net Income using Return of Assets equation:

Net Income = 6% * Total Assets = (0.06 * Sales) / 2.1

Net Income / Sales = Profit Margin = 0.06 / 2.1 = 0.029 (ANSWER PART 1)

Debt to Capital Ratio = Total Debt / Total Invested Capital

Total Assets = Total Equity + Total Debt = Total Invested Capital

Using Return on Equity equation : ROE = Net Income / Total Equity = 8%

Net Income = 8% * Total Equity -----> Equation 1

Using Return on Assets equation : ROA = Net Income / Total Assets = 6%

Net Income = 6% * Total Assets ---- Equation 2

Dividing Equation 1 by 2 we get:

1 = (8% * Total Equity) / (6% * Total Assets)

Total Equity / Total Assets = 6% / 8% = 6/8 = 0.75

Total Debt = Total Invested Capital - Total Equity = Total Assets - Total Equity (Total Assets and Total Invested Capital are same as given in question)

Total Debt / Total Invested Capital = (Total Assets / Total Invested Capital) - (Total Equity / Total Invested Capital)

Therefore, Debt to Capital Ratio = 1 - Total Equity / Total Assets = 1 - 0.75 = 0.25 (ANSWER PART 2)