Question

The fabric house has sales of $411,800, total equity of $237,400, and a debt-equity ratio of .55. what is the capital intensity ratio?

Answer 1

Let's start by defining what capital intensity ratio is. The equation for capital intensity ratio (CIR) is:

CIR = Total Assets/Sales

The sales is equal to $411,800. The missing information is the total assets which is equal to

Total assets = Liabilities + Equity
Liabilities are also equal to debts. We know equity to be $237,400. We get liabilities from the debt-to-equity ratio:

Debt-to-equity ratio = Liabilities/Equity
0.55 = Liabilities/$237,400
Liabilities = $130,570

Now, we can solve it backwards:
Total assets = $130,570 + $237,400
Total Assets = $367,970

CIR = $367,970/$411,800
CIR = 0.893