3-7 CA = $3,000,000; = 1.5; = 1.0; CL = ?; I = ? 3-8 We are given ROA = 4%, ROE = 7%, and TAT = Sales/Total assets = 1.2. From Du Pont equation: ROA = Profit margin Total assets turnover 4% = Profit margin (1.2) Profit margin = 4%/1.2 = 3.33%. We can also calculate the company’s liabilities-to-assets (L/TA) ratio in a similar manner, given the facts of the problem. We are given ROA = NI/TA and ROE= NI/E. We begin by finding the percentage of assets financed by equity, E/TA: = ROA/ROE = 4%/7% = 57.14%. By definition, L + E = Total liabilities & Equity = TA. Therefore, the percentage of the firm financed by liabilities is equal to 1 minus the percentage financed by equity: = 1 = 1 = 42.86%. − −57.14% To find the debt-to-total asset (i.e., the debt ratio), begin with the total liabilities-to-assets ratio of 42.86%. We are given that half of the liabilities are debt, so the debt ratio is: Debt ratio = Debt-to-total assets = (0.5)(L/TA) = (0.5)(42.86%) = 21.43%.
3-7 CA = $3,000,000; = 1.5; = 1.0; CL = ?; I = ? 3-8 We are given ROA = 4%, ROE = 7%, and TAT = Sales/Total assets = 1.2. From Du Pont equation: ROA = Profit margin Total assets turnover 4% = Profit margin (1.2) Profit margin = 4%/1.2 = 3.33%. We can also calculate the company’s liabilities-to-assets (L/TA) ratio in a similar manner, given the facts of the problem. We are given ROA = NI/TA and ROE= NI/E. We begin by finding the percentage of assets financed by equity, E/TA: = ROA/ROE = 4%/7% = 57.14%. By definition, L + E = Total liabilities & Equity = TA. Therefore, the percentage of the firm financed by liabilities is equal to 1 minus the percentage financed by equity: = 1 − = 1 −57.14% = 42.86%. To find the debt-to-total asset (i.e., the debt ratio), begin with the total liabilities-to-assets ratio of 42.86%. We are given that half of the liabilities are debt, so the debt ratio is: Debt ratio = Debt-to-total assets = (0.5)(L/TA) = (0.5)(42.86%) = 21.43%.
BE%20Sols_%20FM14_IM_Ch3.docx