Problem 3-8 Profit Margin and Debt Ratio Assume you are given the following rela

Question

Problem 3-8 Profit Margin and Debt Ratio Assume you are given the following relationships for the Haslam Corporation: Sales/total assets Return on assets (ROA) Return on equity (ROE) 1. Calculate Haslam's profit margin. Do not round intermediate calculations. Round your answer to two decimal places. 2.1 2% 5% 2. Calculate Haslam's liabilities-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places. 3. Suppose half of Haslam's liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places

Explanation / Answer

Answer a.

ROA = Profit Margin * Asset Turnover
2% = Profit Margin * 2.1
Profit Margin = 0.95%

Answer b.

ROE = ROA * Equity Multiplier
5% = 2% * Equity Multiplier
Equity Multiplier = 2.5

Equity Multiplier = Total Assets / Equity
2.50 = Total Assets / Equity
Equity-to-Total Assets = 0.40

Liabilities-to-Total Assets = 1 - Equity / Total Assets
Liabilities-to-Total Assets = 1 - 0.40
Liabilities-to-Total Assets = 0.60 or 60.00%

Answer c.

Debt-to-Assets Ratio = (1/2) * Liabilities-to-Total Assets
Debt-to-Assets Ratio = (1/2) * 60%
Debt-to-Assets Ratio = 30%

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