Question

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RATIO CALCULATIONS

Assume the following relationships for the Caulder Corp.:

Sales/Total assets	1.2x
Return on assets (ROA)	5%
Return on equity (ROE)	15%

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

>>>>

Sales / Total Assets = 1.2X

Total Assets = Sales / 1.2X = 0.83333333X

Return on Assets (ROA) = Net Income / Total Assets

5% = Net Income / 0.8333333X

Net income = 0.04166667X

Profit Margin = 0.04166667X / 1.2X

= 0.03472223

= 3.472223%

Therefore, Profit Margin is 3.47%

>>>>

Return on Equity = Net Income / Equity

15% = 0.04166667X / Equity

Equity = 0.27777778X

Total Assets = Equity + Debt

1.2X = 0.27777778X + Debt

Debt = 0.92222222X

Debt / Equity = 0.92222222X / 0.27777778X

= 3.31999997

Therefore Debt to Equity ratio is 3.32