Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
RATIO CALCULATIONS Assume the following relationships for the Brauer Corp.:
| Sales/Total assets | 1.5x |
| Return on assets (ROA) | 3.0% |
| Return on equity (ROE) | 5.0% |
Calculate Brauer’s profit margin and debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital.
To determine: Profit margin and debt to capital ratio.
DuPont Analysis: Under DuPont analysis, return on equity can be calculated as a product of profit margin, total assets turnover and equity multiplier.
Debt to Capital Ratio: It represents the proportion of debt capital in firm’s total capital. Debt to capital ratio is determined by dividing total debt to total capital.
Solution:
Given,
Return on Assets is 3%.
Return on equity is 5%.
Total asset turnover ratio is
Formula to calculate profit margin,
Substitute 3% for return on assets and
Here, profit margin is 2%.
Calculate debt to capital ratio through return on equity
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