Question

Profit Margin and Debt Ratio

Assume you are given the following relationships for the Haslam Corporation:

Sales/total assets 1.7

Return on assets (ROA) 4%

Return on equity (ROE) 5%

1) Calculate Haslam's profit margin and liabilities-to-assets ratio. Do not round intermediate calculations. Round your answers to two decimal places.

2) Liabilities-to-assets ratio: % Suppose half of its liabilities are in the form of debt.

3) Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

1) We have the given information of Haslam Corporation as Follows.

Sales/Total Assets=1.7

Return on Assets= Net Income/Total Assets = 0.04 (EQUATION-----1)

Return on Equity = Net Income/Equity = 0.05 (EQUATION---2)

We know that Equity + Total Liabilities =Total Assets that means Equity = Total Assets - Total Liabilities(EQUATION--3)

From equation---1 we can say that Net income = 0.04Total Assets (EQUATION--4)

Substituting equation 3 and 4 in Equation 2

(0.04Total Assets )/ (Total Assets - Total liabilities )= 0.05

0.04Total Assets = 0.05Total Assets - 0.05 Total Liabilties

0.05Total Liabilities = 0.01 Total Assets

Total Liabilities/Total Assets = 0.01/0.05 = 0.20 (EQUATION--5)

2)

In most of the times debt is also a liabilty but there is a slight difference between the both, Debt majorly refers to the money you borrowed, but liabilities are your financial responsibilities.

Coming to liabilities to assets ratio we can say that how much of our assets are made from liabilities

Hence when half of liabilties are of debt then,

Total liabilities/2= Debt

Debt + outside Liabilities = 2debt

Outside liabilities = Debt

Hence we can say that Total liabilities=2 Debt or 2 Outside liabilities

Now ,

2Outside liabilities/Total Assets= 0.20( From Eqation--5)

Liabilities-to-assets ratio is =0.10

3) Similarly debt to assets ratio

2Debt/Total Assets = 0.2

debt-to-assets ratio =0.10