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2 April, 04:08

Assume you are given the following relationships for the Brauer Corp:

Sales/Total assets 1.5X

Return on Assets (ROA) 3%

Return on equity (ROE) 3%

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.

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  1. 2 April, 04:28
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    Profit margin = 2%

    Debt to capital = 0

    Explanation:

    We can find out Profit margin through the formula of ROA

    Return on Assets = Asset turnover * Profit margin

    We have been give ROA, and ATO

    ROA=3%

    ATO=1.5X

    So, 3%=1.5*X

    X=2%

    Profit margin is 2%

    Now debt to capital

    It can be calculated from the Dupont analysis which is

    ROE=ROA*Equity multiplier

    Equity multiplier is Assets/Equity

    so,

    3%=3%*x

    EM = 1

    Now, Equity multiplier tells us how much our assets are financed through equity so if it is 1, means Assets/Equity = 1

    So, Assets = Equity

    So, all the assets are financed through equity. None of the assets are financed through debt. So, it suggest debt is 0

    Debt to capital = Debt/Capital = 0/capital = 0
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