Domino Corp.reported to its shareholders a before tax profit such that the ROA is 2.33% and the ROCE is 3.5% (both based on beginning balances).The Return on sales is 8.75%.Gross margin is 40% and Sales General and Administrative expenses amount to 25% of sales.Long-term debts are bearing interest at the rate of 5% per year.The reimbursement of the principal will be in fine (i.e. ,a balloon payment at maturity).Assume that sales revenue for the year was 100 CU.What was the capital structure in the beginning balance sheet?

Question

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Given the sales revenue of 100 CU and a return on sales of 8.75%, the profit before tax is 8.75 CU. With a ROA of 2.33%, the total assets at the beginning are 375.32 CU (8.75 / 0.0233). Given a ROCE of 3.5%, and knowing that ROCE = EBIT / (Shareholder's Equity + Long-term Debt), we can calculate the capital employed. Since EBIT is equal to the profit before tax and interest, and given the interest rate on long-term debt is 5%, we can deduce the structure of the balance sheet. The correct capital structure, considering the given rates and the profit, aligns with option B, where Shareholder's Equity (SHE) and Long-term Debt (LTD) are equal, supporting the calculated figures and the given financial ratios.