Assume the following relationships for the Caulder Corp.: Sales/Total assets 2.1

Question

Assume the following relationships for the Caulder Corp.: Sales/Total assets 2.1x Return on assets (ROA) 5% Return on equity (ROE) 15% 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. Do not round intermediate calculations. Round your answer to two decimal places.

Explanation / Answer

ROE = Net Income/Equity

ROA = Net Income/Assets

Q1. Net Profit Margin = ?

ROA = Net Income/Assets

ROA = Net Income/Assets * (Sales/Sales)

ROA = (Net Inomce/Sales) * (Sales/Total Assets)

5% = (Net Inomce/Sales) * 2.1x

Net Income/Sales is Net profit margin which we need to calculate

Hence Net Profit margin = 2.38%

b) As mentioned in question, Total Assets = Total Capital

Based on Du Pont Equation,

ROE = Net Profit Margin * (Sales/Toal Assets) * (Assets/Equity)

15% = 2.38% * 2.1 * (Assets/Equity)

(Assets/Equity) = 3x

=> Equity/Assets = 1/3

Assets = Total Capital = Debt + Equity

=> Equity/total capital = 1/3

=> Debt/Total Capital = 1 - 1/3 = 2/3 = 66.67%

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