11 Click here to read the eBook: Profitability Ratios RATIO CALCULATIONS Assume

Question

11

Click here to read the eBook: Profitability Ratios RATIO CALCULATIONS Assume the following relationships for the Caulder Corp. Sales/Total assets Return on assets (ROA) Return on equity (ROE) a. Calculate Caulders profit margin assuming the firm uses only debt and common equity, so total assets equal total invested capital. Round your answer to two 1.4x 3% 8% decimal places. b. 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.

Explanation / Answer

Part a Profit margin = ROA / Sales-total asset ratio

Profit margin = 3/1.4 = 2.14 %

Part b Asset/Equity = ROE/ROA

Asset/Equity = 8/3 = 2.67

Now asset = debt + equity , so

(Debt + Equity)/Equity = 2.67

Debt/Equity = 1.67x or 166.67 %

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