Question

Assume the following relationships for the Caulder Corp.:

Sales/Total assets - 2.3x

Return on assets (ROA) - 3%

Return on equity (ROE) - 10%

1. 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.

2. 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

Let us assume total assets to be 100
Sales/ Total assets = 2.3
Sales = 2.3 * 100	230
ROA = Net income / Total assets
3% = Net income / 100
Net income = 100 * 3%	3
Profit margin = Net income / sales = 3 / 230	1.30%
ROE = Net income / Equity
10% = 3 / Equity
Equity = 3 / 10%	30
Debt = Total assets - Equity = 100 - 30	70
Debt-to-capital ratio = Debt / Total assets = 70 / 100	0.70