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Assume you are given the following relationships for the Clayton Corporation: Sales/Total assets: 1.5X Return on assets (ROA): 3%
Return on equity (ROE): 5%Calculate Clayton’s profit margin and debt ratio.These are the answers provided...but I dont know how to calculate to come to these solutions:Net profit margin 2% Debt Ratio 40%
Return on assets = Profit margin x Assets turnover
.03 = profit margin x 1.5
.03/1.5 = .02 or 2 percent
therefore profit margin = 2 percent
Return on assets / Return on equity = .03/.05 = 0.6 or 60 percent of total assets is from equity, therefore debt = Assets - equity = 1-0.6 = 0.4 or 40 percent therefore debt ratio =40 percent