Question

Profit Margin and Debt Ratio

Assume you are given the following relationships for the Haslam Corporation:

Sales/total assets	1.3
Return on assets (ROA)	4%
Return on equity (ROE)	5%

Calculate Haslam's profit margin and liabilities-to-assets ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Profit margin:   %

Liabilities-to-assets ratio:   %

Suppose half of its 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.

  %

Answer 1

Answer a.

Total Asset Turnover = Sales / Total Assets
Total Asset Turnover = 1.30

Return on Assets = Profit Margin * Total Asset Turnover
4.00% = Profit Margin * 1.30
Profit Margin = 3.08%

Return on Equity = Return on Assets * Equity Multiplier
5.00% = 4.00% * Equity Multiplier
Equity Multiplier = 1.25

Equity Multiplier = Total Assets / Total Equity
1.25 = Total Assets / Total Equity
Total Equity / Total Assets = 0.80
Equity-to-Assets Ratio = 0.80

Liabilities-to-Assets Ratio = 1 - Equity-to-Assets Ratio
Liabilities-to-Assets Ratio = 1 - 0.80
Liabilities-to-Assets Ratio = 0.20 or 20.00%

Answer b.

Debt-to-Assets Ratio = (1/2) * Liabilities-to-Assets Ratio
Debt-to-Assets Ratio = (1/2) * 0.20
Debt-to-Assets Ratio = 0.10 or 10.00%