   Chapter 4, Problem 11P Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

RATIO CALCULATIONS Assume the following relationships for the Caulder Corp.: Sales/Total assets 1.3× Return on assets (ROA) 4.0% Return on equity (ROE) 8.0%

Summary Introduction

To determine: Profit margin and debt to capital ratio.

Introduction:

DuPont Analysis:

Under DuPont analysis the 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 the firm’s total capital. Debt to capital ratio is determined by dividing total debt to total capital.

Explanation

Given,

Return on Assets is 4%.

Return on equity is 8%.

Total asset turnover ratio is 1.3× .

Profit margin

Formula to calculate profit margin,

Profitmargin=Return on assetsTotal assets turnoverratio

Substitute 4% for return on assets and 1.3× for total asset turnover ratio.

Profitmargin=4%1.3×=0.0307or3.07%

Here, profit margin is 3.07%.

Debt to capital ratio

To calculate the debt to capital ratio, firstly calculate equity to asset as follow:

Formula to calculate return on equity,

Return on equity=Returnonassets×TotalassetsCommonequity

Substitute 8% for return on equity, 4% for return on assets

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