Assume the following relationships for the Caulder Corp Sale

Assume the following relationships for the Caulder Corp.:

Sales/Total assets 2.1x

Return on assets (ROA) 5%

Return on equity (ROE) 14%

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.

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.

Solution

1. Sales = 2.1 x Total Assets

ROA = Net Income / Total Assets

Net Income = ROA x Total Assets

= 5% x Total Assets

Profit Margin = Net Income / Sales

= (5% x Total Assets) / (2.1 x Total Assets) = 5%/2.1 = 2.38

2). ROE = ROA x EM

14% = 5% x EM

EM = 14%/5% = TA/E

Take the reciprocal:

E/TA = 5/14 = 35.71%

therefore,

D/A = 1 - .3571 = .6429 = 64.29%

Thus, its debt-to-capital ratio = 64.29%